Bankrupt retailer Steve & Barry's LLC stepped back from the brink of liquidation, agreeing to be acquired by turnaround specialist Bay Harbour Management LC for $163 million.

Bay Harbour plans to operate the chain store as a going concern, so long as a deal on renegotiated leases can be reached. The ability of Steve & Barry's to stay in business would be a godsend to mall owners across the country, who ponied up hundreds of millions of dollars to attract the stores into huge, empty spaces, often as large as 100,000 square feet.

The closely held retailer operates 276 stores, which specialize in T-shirts and other inexpensive clothes, some of which were launched in conjunction with celebrities such as actress Sarah Jessica Parker, tennis star Venus Williams and surfer Laird Hamilton.

It quickly went from one of America's fastest-growing retailers to one of its more-unusual fiascos. The company, based in Port Washington, N.Y., filed for Chapter 11 bankruptcy protection last month as the company blamed a liquidity squeeze for its failing fortunes and inability to raise rescue financing.

Bay Harbour is acting as a stalking-horse, or lead bidder. Subject to bankruptcy-court approval, the stalking-horse proposal will serve as the opening bid during an auction process scheduled to take place later in the month. The offer will be subject to higher and better proposals at that auction.

With fashion clothes priced below $10, Steve & Barry's deep-discount model was built to thrive in a difficult economic environment. In a 2006 interview, co-founder and Co-Chief Executive Barry Prevor said the U.S. market could support 5,000 stores. But a souring economy has made this a brutal period for retailers, who are pinched by slackening consumer spending and higher transportation costs. For Steve & Barry's, which ran its operations on the thinnest of margins, these factors made it all the more difficult to survive.

At the time of the bankruptcy filing, Mr. Prevor and his business partner, Steve Shore, said that the company's rapid growth during its 23-year history -- including same-store sales up 25% the first five months of this year -- hasn't been enough "in the current credit and economic environment."

Bay Harbour's holdings have included the Planet Hollywood Resort & Casino on the Las Vegas Strip, which the hedge fund helped to finance after buying the Aladdin out of bankruptcy.

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