Limited Liability Company Agreement

LIMITED LIABILITY COMPANY AGREEMENT

OF


SPELL C. LLC

This Limited Liability Company Agreement (together with the schedules attached hereto, this "Agreement") of SPELL C. LLC (the "Company"), is entered into by Cherokee Inc., a Delaware corporation, as the sole member (the "Member"). Capitalized terms used and not otherwise defined herein have the meanings set forth on Schedule A hereto.
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The Member, by execution of this Agreement, (i) hereby forms the Company as a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del.C. (S)18-101, et seq.), as amended
------ -- --- from time to time (the "Act"), and this Agreement and (ii) hereby agrees as follows:


1. Name.
----


The name of the limited liability company formed hereby is SPELL C. LLC.


2. Principal Business Office.
-------------------------


The principal business office of the Company shall be located at 625 Landor Lane, Pasadena, California 91106, or such other location as may hereafter be determined by the Member.


3. Registered Office.
-----------------


The address of the registered office of the Company in the State of Delaware is c/o RL&F Service Corp., One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington, New Castle County, Delaware 19801.


4. Registered Agent.
----------------


The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware is RL&F Service Corp., One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington, New Castle County, Delaware 19801.


5. Member.
------


a. The mailing address of the Member is set forth on Schedule B
---------- attached hereto.


b. Subject to Section 9j, the Member may act by written consent.


6. Certificates.
------------


James G. Leyden, Jr., is hereby designated as an "authorized person" within the meaning of the Act, and has executed, delivered and filed the Certificate of Formation of the Company with the Secretary of State of the State of Delaware. Upon the filing of the Certificate of Formation with the Secretary of State of the State of Delaware, his powers as an "authorized person" ceased, and the Member thereupon became the designated "authorized person" and shall continue as the designated "authorized person" within the meaning of the Act. The Member or an Officer shall execute, deliver and file any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in California and in any other jurisdiction in which the Company may wish to conduct business.


7. Purposes.
--------


Subject to Section 9j, the purposes of the Company are to engage in the following activities:


a. (i) to acquire, own, hold, administer, service, grant or enter into agreements for the servicing of, finance, manage, sell, assign, pledge, collect amounts due on and otherwise deal with the Trademark, the Trademark License and other assets to be acquired pursuant to the Basic Documents and any proceeds or rights associated therewith and other licenses relating thereto and agreements pertaining thereto;


(ii) to issue, sell, authorize and deliver the Notes and other evidences of the Indebtedness and to enter into any agreement or document providing for the authorization, issuance, sale and delivery of the Notes;


(iii) to sell, exchange, pledge, encumber or otherwise dispose of all or any part of the Trademark, the Trademark License and the Company's other assets and property and, in connection therewith, to accept, collect, hold, sell, exchange or otherwise dispose of evidences of indebtedness or other property received pursuant thereto, including without limitation the granting of security interests to secure the Indebtedness;


(iv) to execute, deliver and perform the Basic Documents;


(v) to invest proceeds from the Trademark, the Trademark License and the Company's other assets and any capital and income of the Company in accordance with the Basic Documents or as otherwise determined by the Board and not inconsistent with this Section 7 or the Basic Documents; and


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(vi) to do such other things and carry on any other activities which the Board determines to be necessary, convenient or incidental to any of the foregoing purposes, and have and exercise all of the power and rights conferred upon limited liability companies formed pursuant to the Act.


b. The Company, by or through any Officer on behalf of the Company, may enter into and perform the Basic Documents, including without limitation the Note Issuance Documents (including without limitation the issuance of the Notes pursuant thereto) and the Administrative Services Agreement, and all documents, agreements, certificates, or financing statements contemplated thereby or related thereto, all without any further act, vote or approval of the Member or any Director or Officer notwithstanding any other provision of this Agreement, the Act or applicable law, rule or regulation. The foregoing authorization shall not be deemed a restriction on the powers of any Officer to enter into other agreements on behalf of the Company.


8. Powers.
------


Subject to Section 9j, the Company, and the Board of Directors and the proper Officers of the Company on behalf of the Company, (i) shall have and exercise all powers necessary, convenient or incidental to accomplish its purposes as set forth in Section 7 and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act.


9. Management.
----------


a. Board of Directors. Subject to Section 9j, the business and
------------------ affairs of the Company shall be managed by or under the direction of a Board of one or more Directors. Subject to Section 10, the Member may determine at any time in its sole and absolute discretion the number of Directors to constitute the Board. The authorized number of Directors may be increased or decreased by the Member at any time in its sole and absolute discretion, upon notice to all Directors, and subject in all cases to Section 10. The initial number of Directors shall be three, one of which shall be an Independent Director pursuant to Section 10. Each Director elected, designated or appointed shall hold office until a successor is elected and qualified or until such Director's earlier death, resignation or removal. Each Director shall execute and deliver the Management Agreement. Directors need not be a Member.


b. Powers. Subject to Section 9j, the Board of Directors shall have
------ the power to do any and all acts necessary, convenient or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise. Subject to Section 7, the Board of Directors has the authority to bind the Company.


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c. Meeting of the Board of Directors. The Board of Directors of the
--------------------------------- Company may hold meetings, both regular and special, within or outside the State of Delaware. Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board. Special meetings of the Board may be called by the President on not less than one day's notice to each Director by telephone, facsimile, mail, telegram or any other means of communication, and special meetings shall be called by the President or Secretary in like manner and with like notice upon the written request of any one or more of the Directors.


d. Quorum; Acts of the Board. At all meetings of the Board, a
------------------------- majority of the Directors shall constitute a quorum for the transaction of business and, except as otherwise provided in any other provision of this Agreement, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board. If a quorum shall not be present at any meeting of the Board, the Directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee, as the case may be.


e. Electronic Communications. Members of the Board, or any
------------------------- committee designated by the Board, may participate in meetings of the Board, or any committee, by means of telephone conference or similar communications equipment that allows all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting. If all the participants are participating by telephone conference or similar communications equipment, the meeting shall be deemed to be held at the principal place of business of the Company.


f. Committees of Directors.
-----------------------


(i) The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Company. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.


(ii) In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member.


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(iii) Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Company. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. Each committee shall keep regular minutes of its meetings and report the same to the Board when required.


g. Compensation of Directors; Expenses. The Board shall have the
----------------------------------- authority to fix the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at meetings of the Board, which may be a fixed sum for attendance at each meeting of the Board or a stated salary as Director. No such payment shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.


h. Removal of Directors. Unless otherwise restricted by law, any
-------------------- Director or the entire Board of Directors may be removed, with or without cause, at any time by the Member, and, subject to Section 10, any vacancy caused by any such removal may be filled by action of the Member.


i. Directors as Agents. To the extent of their powers set forth in
------------------- this Agreement and subject to Section 9j, the Directors are agents of the Company for the purpose of the Company's business, and the actions of the Directors taken in accordance with such powers set forth in this Agreement shall bind the Company.


j. Limitations on the Company's Activities.
---------------------------------------


(i) This Section 9j is being adopted in order to comply with certain provisions required in order to qualify the Company as a "special purpose entity" for the purpose of the Indebtedness.


(ii) The Member shall not, so long as any Indebtedness is outstanding, amend, alter, change or repeal the definition of "Independent Director" or Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26 or 31 or Schedule A of
---------- this Agreement without the unanimous written consent of the Board (including the Independent Director). Subject to this Section 9j, the Member reserves the right to amend, alter, change or repeal any provisions contained in this Agreement in accordance with Section 31.


(iii) Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Member or the Board, neither the Member nor the Board shall be authorized or empowered, nor shall they permit the Company, without the prior unanimous written consent of the Member and the Board (including the Independent Director), to take any Material Action.


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(iv) The Board and the Member shall cause the Company to do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided,
-------- however, that the Company shall not be required to preserve any such right or - ------- franchise if the Board shall determine that the preservation thereof is no longer desirable for the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the holders of the Indebtedness and the Company shall deliver to the Note Trustee an Officer's Certificate to that effect. The Board also shall cause the Company to:


(1) maintain its own separate books and records and bank
accounts;


(2) at all times hold itself out to the public as a legal
entity separate from the Member and any other Person;


(3) have a Board composed differently from that of the
Member and any other Person;


(4) file its own tax returns, if any, as may be required
under applicable law, to the extent (a) not part of a
consolidated group filing a consolidated return or
returns or (b) not treated as a division for tax
purposes of another taxpayer, and pay any taxes so
required to be paid under applicable law;


(5) not commingle its assets with assets of any other
Person;


(6) conduct its business in its own name;


(7) maintain separate financial statements;


(8) pay its own liabilities only out of its own funds;


(9) maintain an arm's length relationship with its
Affiliates and the Member;


(10) pay the salaries of its own employees, if any;


(11) not hold out its credit as being available to satisfy
the obligations of others;


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(12) allocate fairly and reasonably any overhead for
shared office space;


(13) use separate stationery, invoices and checks;


(14) not pledge its assets for the benefit of any other
Person other than pursuant to the Note Issuance
Documents;


(15) correct any known misunderstanding regarding its
separate identity;


(16) maintain adequate capital in light of its
contemplated business purposes;


(17) cause its Board of Directors to meet at least
annually or act pursuant to written consent and keep
minutes of such meetings and actions and observe all
other Delaware limited liability company formalities;
and


(18) not acquire any obligations or securities of the
Member.


(v) So long as any Indebtedness is outstanding, the Board shall not cause or permit the Company to:


(1) guarantee any obligation of any Person, including any
Affiliate;


(2) engage, directly or indirectly, in any business other
than that arising out of the issuance of the
Indebtedness or the actions required or permitted to
be performed under Section 7, the Note Issuance
Documents or this Section 9j;


(3) incur, create or assume any indebtedness other than
the Indebtedness or as otherwise expressly permitted
under the Note Issuance Documents;


(4) make or permit to remain outstanding any loan or
advance to, or own or acquire any stock or securities
of, any Person, except that the Company may invest in
those investments


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permitted under the Note Issuance Documents and may
make any advance required or expressly permitted to
be made pursuant to any provisions of the Note
Issuance Documents and permit the same to remain
outstanding in accordance with such provisions;


(5) to the fullest extent permitted by law, engage in any
dissolution, liquidation, consolidation, merger,
asset sale or transfer of ownership interests other
than such activities as are expressly permitted
pursuant to any provision of the Note Issuance
Documents; or


(6) form, acquire or hold any subsidiary (whether
corporate, partnership, limited liability company or
other).


10. Independent Director.
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As long as any Indebtedn ...