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VERITEXT REPORTING COMPANY www.veritext.com
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 10-13800-scc - - - - - - - - - - - - - - - - - - - - -x In the Matter of:
INNKEEPERS USA TRUST, et al.,
Debtors. - - - - - - - - - - - - - - - - - - - - -x
U.S. Bankruptcy Court One Bowling Green New York, New York
March 11, 2011 10:04 a.m.
B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE
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Page 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Transcribed by: Esther Accardi DOC #820, DEBTORS' Motion for Entry of an Order (I) Authorizing the Debtors to Enter Into the Commitment Letter With Five Mile Capital II Pooling REIT LLC, Lehman ALI Inc., and Midland Loan Services, (II) Approving the New Party/Midland Commitment Between the Debtors and Midland Loan Services, (III) Approving Bidding Procedures, (IV) Approving Bid Protections, (V) Authorizing an Expense Reimbursement to "Bidder D," and (VI) Modifying Cash Collateral Order to Increase Expense Reserve.
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Page 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: LORENZO MARINUZZI, ESQ.

A P P E A R A N C E S : KIRKLAND & ELLIS LLP Attorneys for Debtors 655 Fifteenth Street, N.W. Washington, DC 20005
BY:
DANIEL T. DONOVAN, ESQ. PATRICK M. BRYAN, ESQ.
KIRKLAND & ELLIS LLP Attorneys for Debtors 601 Lexington Avenue New York, New York 10022
BY:
ANUP SATHY, P.C.
MORRISON & FOERSTER LLP Attorneys for Creditors' Committee 1290 Avenue of the Americas New York, New York 10104
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Page 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: LAWRENCE P. GOTTESMAN, ESQ. MICHELLE MCMAHON, ESQ.

A P P E A R A N C E S : (continued) HAYNES AND BOONE LLP Attorneys for Midland Loan Services 30 Rockefeller Plaza, 26th Floor New York, New York 10112
BY:
LENARD M. PARKINS, ESQ.
HAYNES AND BOONE LLP Attorneys for Midland Loan Services 201 Main Street, Suite 2200 Fort Worth, Texas 76102
BY:
JOHN D. PENN, ESQ.
BRYAN CAVE LLP Attorneys for LNR 1290 Avenue of the Americas New York, New York 10104
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A P P E A R A N C E S : SIDLEY AUSTIN LLP Attorneys for Appaloosa Funds 787 Seventh Avenue New York, New York 10019
BY:
DEBRA J. MINOFF, ESQ. LEE S. ATTANASIO, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ Attorneys for Chatham Realty Trust 51 West 52nd Street New York, New York 10019
BY:
DAVID C. BRYAN, ESQ. DAVID FISCHMAN, ESQ.
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Page 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: TODD C. MEYERS, ESQ.

A P P E A R A N C E S : DECHERT LLP Attorneys for Lehman 1095 Avenue of the Americas New York, New York 10036
BY:
MICHAEL J. SAGE, ESQ. BRIAN E. GREER, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Attorneys for Apollo Investment Corporation 1285 Avenue of the Americas New York, New York 10019
BY:
ANDREW J. EHRLICH, ESQ.
KILPATRICK TOWNSEND & STOCKTON LLP Attorneys for Trimont 1100 Peachtree Street, N.E., Suite 2800 Atlanta, Georgia 30309
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A P P E A R A N C E S : KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Attorneys for Five Mile Capital 1633 Broadway New York, New York 10019
BY:
HOWARD W. SCHUB, ESQ. ADAM L. SHIFF, ESQ. DANIEL A. FLIMAN, ESQ.
APPEARING TELEPHONICALLY: MICHAEL FRANCO, FAIRMONT AARON K. BRYSON, SPRING HILL CAPITAL PARTNERS DAVID NEFF, PERKINS COIE LLP SINA TOUSSI, ONE EAST PARTNERS JOE CRISCIONE, ESOPUS CREEK ADVISORS MARK FINK, KILPATRICK TOWNSEND ANDREW SOLE, ESOPUS CREEK ADVISORS
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INNKEEPERS USA TRUST, et al.

Page 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you. THE COURT: Okay. We are being watched by a today? UNIDENTIFIED SPEAKER: Well, thank you, Judge. Thank THE CLERK: THE COURT: P R O C E E D I N G S All rise. Good morning. Good morning. All right, how is everybody
UNIDENTIFIED SPEAKER: THE COURT: Be seated.
delightful group of students from Canada, so I expect you all to be on your best behavior today for their benefit. can count on you in that regard. All right, Mr. Sathy, where are we? MR. SATHY: THE COURT: MR. SATHY: Good morning, Your Honor. Good morning. Anup Sathy from Kirkland. I know I
Your Honor, we submitted a revised order to the parties and to chambers this morning, reflecting the results of our discussions from our hearing -- from our hearing yesterday. Your Honor, we -- we're ready to move forward with the Five Mile Lehman bid. THE COURT: MR. SATHY: Okay. Proposal. As Your Honor knows, there was
a series of objections, we believe all of them have been resoled, other than the one of Appaloosa, which is still
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Page 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 please. pending. The time was used yesterday to have, you know, candid discussions with a number of the constituents and sponsors. The result of those discussions is an additional concession that the debtors have received, which is the elimination of the breakup fee in total, under the Five Mile Lehman proposal. The expense reimbursement continues, but the breakup fee is gone. THE COURT: MR. SATHY: on the motion. All right. We're prepared to move forward, obviously
All of the declarations, I believe, have been
submitted, and we ask that they be submitted into evidence. THE COURT: MR. SATHY: All right. We don't believe that any of the parties
are seeking direct or cross-examination, including Appaloosa, and so we're prepared to move forward however the Court wants with argument, or -- Your Honor, we obviously still reserve our position with respect to standing, but we will move forward -THE COURT: MR. SATHY: THE COURT: Okay. -- with the Court's direction. All right. Before we go further, let me
find out or confirm who's on the phone, because we still have the confidentiality concerns that have always existed here. So can I hear from the folks who are on the phone,
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Page 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 observer. THE COURT: MS. CHEN: All right, and who -With regard to -Partners. THE COURT: All right. Now One East and Spring Hill MR. NEFF: Good morning, Judge. David Neff on behalf
of CW Capital Asset Management LLC and C3 Capital Asset Management LLC. THE COURT: MR. FRANCO: THE COURT: MR. TOUSSI: THE COURT: MR. TOUSSI: THE COURT: MR. TOUSSI: THE COURT: MR. BRYSON: All right. Thank you, Mr. Neff.
Michael Franco from Fairmont. Thank you. Sina Toussi from One East Partners. I'm sorry, give that to me again. Sina Toussi from One East Partners. One East Partners. Yes, ma'am. All right, thank you. Aaron Bryson, Spring Hill Capital
are not parties to the protective order, correct? MR. BRYSON: THE COURT: That's right. Okay, anyone else? Good morning, Your Honor. Joe
MR. CRISCIONE:
Criscione from Esopus Creek Advisors, ad hoc equity committee. THE COURT: MS. CHEN: All right. And is Ms. Chen on the line?
This is Ms. Chen, Ropes & Gray, here as an
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Page 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 phone. MR. FINK : Good morning, Your Honor. Mark Fink from THE COURT: Very well. Is there anyone else on the
Trimont -- from Kilpatrick Townsend regarding Trimont Real Estate Advisors Inc. THE COURT: MR. SOLE: All right. Good morning, Your Honor. Andrew Sole for
Esopus Creek Advisors, ad hoc committee. THE COURT: All right, thank you.
All right, that appears to be it. Well, then, why don't I hear whatever argument you'd like to make, and then I can hear from any other party that wishes to be heard. MR. PENN: Your Honor, John Penn on behalf of Midland. We had advised a number of
This is just an evidentiary matter.
the parties that the declarations that we had submitted -- we had submitted, both declaration of Mr. Greenspan and Mr. Simone. THE COURT: MR. PENN: Yes. With Mr. Greenspan we're leaving in, but
Mr. Simone, we are not submitting. THE COURT: MR. PENN: THE COURT: Okay, thank you for that. So that will not be included in the record. All right. And someone also had submitted
the declaration of Mr. Icahn, is that correct?
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Page 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Yes, Mr. Meyers. MR. MEYERS: THE COURT: MR. MEYERS: THE COURT: Bienenstock. MR. BIENENSTOCK: Your Honor, for the ad hoc Yes. That will be Trimont, Your Honor.
All right. And that can be withdrawn. That can be withdrawn, all right. Mr.
committee, as I mentioned yesterday, I forget whether it was in the courtroom or in chambers, at the close of this matter we request a chambers conference with Your Honor on an urgent matter. The debtor knows what it's about. I don't know mind
if everyone attends, but it really only affects the debtor and Mr. Shelley (ph.) may want to attend. hoc committee and the debtor. THE COURT: All right. That's a little cryptic. But But it's between the ad
it's not -- does not rise to the level of an objection to what is happening this morning. MR. BIENENSTOCK: THE COURT: MR. PARKINS: All right. Thank you.
All right. One point, Your Honor. I think that
before we have argument I'd like to get a ruling from Your Honor on the standing issue. THE COURT: Well, you may like to get a ruling from me
on the standing issue, but you will get a ruling by the end of the day, but not at this juncture. So just to unpack that a
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Page 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 little bit. I'm prepared to hear Ms. Attanasio's argument.
And once I make a determination on standing either those arguments and objections will be considered on the merits or they won't. But I think I want to proceed ahead.
And assuming that we're not going to run very long, I think we'll be in a position to give you a ruling by the end of the day, and, also, by the time that folks have to leave for Friday obligations and other obligations. All right.
Anybody else, anything preliminary? All right, Mr. Sathy. MR. SATHY: it's uncontroverted. Okay. Your Honor, the record is clear and
And this is what it tells us. We have added
This is the best proposal we have.
almost 100 million dollars of value to the original Five Mile proposal that was given to the debtors. And with the
elimination of the breakup fee, Your Honor, the costs of locking in this proposal are relatively modest. Second, it has been heavily marketed. Mr. Derrough
has submitted three declarations in support of the motion, outlining a process that we outlined to this Court released -that started in November. And it has been robust. It is still It
ongoing, it's going on this week.
It's going on today.
will go on until there's an actual approval of a transaction. There is continuing market interest, there's no question about it. But the bid procedures that we have agreed
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Page 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 base. to is in some ways -- in many ways designed to attract additional interest. In particular, Your Honor, secured creditors have agreed to waive their credit bid rights, as long as we proceed down the path of this auction. Which is a critically important
concession, and we think a very important aspect of the bid procedures. Secured creditors have agreed to support the results of the auction. In other words, if someone else wins and we
follow the rules of these procedures, secured creditors have agreed to support the results. And Midland has agreed to provide financing to the winner of an auction, to the extent that the winner complies with the rules and conditions of the auction. Third, it has overwhelming support from our creditor Your Honor, secured creditors who are owed over a
billion dollars support this transaction and support this process. Unsecured creditors also support this transaction and There are no objections from creditors with
this process.
respect to this transaction and this process. The transaction is firm. It is not subject to any due These parties are In some
diligence, it's not subject to financing.
well associated with these assets, they know them. cases they financed them.
And we're comfortable that these
parties are prepared and will close.
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Page 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The transaction is subject to a new and improved and streamlined fiduciary out. It's one sentence, and it's clear.
We can do whatever we want if we're following our fiduciary duties. Obviously, the board needs to take advice from counsel
and advisors, but it is an unqualified fiduciary out. And so when the contractual flexibilities we have are coupled with the economic flexibility that resulted from the breakup fee being eliminated, Your Honor, we believe we have a tremendous amount of flexibility to consider any and all transactions. Your Honor, it was the product of an arm's length negotiation that was contentious and tough. And I think Your This has
Honor saw a glimpse of it yesterday at the hearing. not been an easy negotiation.
In many respects it has taken a I think it's a
lot longer than most of us has expected.
function of the number of people involved, the number of issues, and the difficulty of putting together a transaction. When I was here in December, I believe, and I told you I thought we'd be filing a motion before we all left for Christmas, that was what I thought at the time. over a month from that period. And it took
And, in part, You honor, that
negotiation was difficult and it was contentious, but it was arm's length and it was in good faith. Your Honor, this proposal has been in the public arena for almost fifty days now. It has survived the rigors of the
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Page 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 market, and we believe still today, that it is the best proposal as modified through the course of the last two months. Your Honor, the most significant modification was the one that we outlined in the papers earlier this week. The
elimination of what we affectionately call the seven sisters. Your Honor, we still believe that the enterprise should stay together. We believe that's the best way to maximize value.
In the course of the fifty days from the time we filed the motion to the time we agreed to split off the seven sisters, we facilitated numerous discussions and negotiations between the sponsors and the parties that were not signed up to that deal. And those discussions really took two forms. One was
to try to attract seven sister creditors and preferred holders to the current deal. And the second, on a parallel path, was
to try to figure out a way to divide them up, to the extent that was what people sought. And to be clear, Your Honor, there was never a clear answer to what anybody wanted with respect to putting them together, taking them apart. And, obviously, with the number
of the people there were that many opinions as well. And so, Your Honor, we're here today on a certain set of procedures. And when we sought to develop the procedures we
were trying to address some of the unique characteristics of this capital structure. When we sat down with creditors and
servicers, one of the first things we heard was we want to opt-
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Page 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 out. We want to opt-out. We want the debtor to run a process And we heard that
and if we don't like it, we want to opt-out.
course for a very long period; from September until the time we filed the motion. And from our perspective, having an opt-out was a waste of time, and we didn't think was going to incentivize people to show up. And if they did, we didn't think it was
going to give the best value. And so as a result of the way we designed the procedures, again, secured creditors, Midland, Lehman have agreed to waive their credit bid rights. support the results of the auction. They have agreed to
But in addition to that,
as we've described in the papers, Midland has agreed to provide the financing. And we think that package of benefits is
extraordinarily positive to our process. The provisions that people have objected to or have pointed out are some of the same provisions that the debtor also thought. And I think our papers were very clear that
there were certain provisions that we didn't think were appropriate. But in the context of a bid procedures, and in
the context of business judgment, we don't believe that we need to win every point. Obviously, this is a package, there are
things we like, there are things we don't like, and the negotiation continued. THE COURT: But the Lehman cash out is a big point.
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Page 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: The Lehman cash out is a very big point.
And the way -- and as you know, in our papers, we highlighted that in many, many places. The Lehman cash out is really a In other words, when we
product I think of this structure.
started what we wanted to do was develop a structure where the creditors would support the results of that auction; Midland and Lehman. And we wanted Midland to provide the financing. Now,
when you start with a premise, which is where we started, and we believe the evidence supports that Midland is reasonable in agreeing to provide a seventy percent debt-to-cap financing. That's the start of the entire analysis. And if you believe --
if you start from there, and you believe that that's reasonable, then the cash out is a natural consequence from that premise. Because, in essence, what happened is we thought We
it was very critical for Midland to provide the financing.
think buyers will like that, the market has told us that that's important, and Mr. Derrough's testimony and his affidavits have confirmed that. What happened from that point is -- was a inter -basically an intercreditor reallocation. The seventy percent
debt-to-cap on the Midland pool and on the Lehman pool could have been done in a way that was seventy percent debt and thirty percent equity for each of the pools. have been a seventy percent debt-to-cap. And that would
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Page 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And what, in essence, happened, was through that arrangement between the two creditors Midland for its own reasons decided it wanted all of the debt. And so, in essence,
what happened -- and because it's a REMIC and it wants to hold debt and the debt matures in 2017 as currently in the REMIC, to us that felt like a reasonable position for them to take. so when you shifted values between -THE COURT: MR. SATHY: Well, and also, Lehman doesnt want debt. And Lehman doesn't want debt. The And
Lehman's debt matured and it's -- and it has told us it does not want to take debt. And so, in essence, the creditors
agreed to shift, basically, the debt and the equity in such a way that Midland has all of the debt, Lehman has, in essence, all of the equity or cash. to-cap for the whole thing. So if someone were to take the Midland financing and say I like the Midland financing, but it's 100 percent of the leverage for those assets, but I want to put debt on the Lehman side, you're going to violate the seventy percent debt-to-cap and, in essence, you don't get the Midland financing. And so when you look at in context you can't have the Midland financing and say I want to give Lehman debt because it will, in essence, violate the seventy percent. So you have to Subject to a seventy percent debt-
take this package -- I'm saying I'm going to take 100 percent leverage on the Lehman assets and put no leverage on the -- 100
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Page 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in? MR. SATHY: Absolutely. Absolutely. We, as the way -MR. SATHY: THE COURT: Absolutely. -- that's where the fiduciary out comes percent debt on the Midland assets and no leverage on the Lehman assets, the result then is that Lehman either has to get cash or equity. And what Lehman has told us is in the context
of this bidding, they don't want equity, the don't want a different partner. Now, they've signed a lockup agreement with Five Mile that says this is the deal they want. And until that deal's
terminated, they're not signing up without their deal. THE COURT: financing -MR. SATHY: THE COURT: Of course. -- and wants to hack it up different But if somebody comes in with their own
debtor, will have the ability if someone wants to come in and say I want my own financing or I want to take one pool, and I want to take both pools. We have the ability, through the
fiduciary out now -- we have always had a fiduciary out with a cost. The cost used to be ten million dollars, now it's three But with the cost to be able to exercise our
million dollars.
ability to find a different transaction. And so all of these issues, including the allocation,
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Page 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Tuesday. THE COURT: Tuesday maybe, okay. And now this is the the seventy percent, the Midland financing, the cash out, they all are related. We didn't like the cash out, but it is part And for us it was important to
of this rubric of benefits.
have the financing, and it was important for bidders to know that our creditors supported a process. Because that's what
our bidders were saying, that's what the bidders in the market was telling us. Why would we go spend all of this time, all of
this energy, all of this money, all of these resources, go into a bankruptcy court, have our -- all the litigation associated with it, and not be able to win. THE COURT: Well, let me -- that raises a point that I
think is still in the -- what I'm going to use as terminology of the final Five Mile Lehman bid. So the iterations that I'm
going to think about are the original. MR. SATHY: THE COURT: yesterday. before. Uh-huh. The revised, which I think was filed It was either yesterday or the day
Time flies.
Maybe it was the day before? MR. SATHY: THE COURT: MR. SATHY: The one that carved out the seven sisters. The one that carved out the seven sisters. It was earlier this week; I think it was
going to be the final, which has not yet been filed, correct? The parties have, but I don't think you have --
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Page 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: Correct. Okay. By the way, if you have any extra But on that point, I see that it
copies it would be helpful.
reflects the provision on page 5 that any bidder that comes in is not going to have the right to request expense reimbursement. In other word -- any competing bidder shall be
deemed to waive the right to seek or assert a 503(b) claim. I'm just wondering whether that's a good thing, and whether you can really do that. MR. SATHY: THE COURT: MR. SATHY: THE COURT: This is the 503 claim? Yeah. Well, Your Honor, I think that -I mean, we're still giving -- you're still
asking to approve 500,000 dollars to so-called bidder D. MR. SATHY: THE COURT: MR. SATHY: THE COURT: That's correct. Right? That's correct, yes. So, hypothetically, if bidder E shows up
and the deal improves -- stays with Five Mile Lehman but improves by a bigger number I'm just asking if -- what your basis is for urging that I approve that provision? MR. SATHY: Yeah. Your Honor, I think -- again, in
the context of a negotiation this was a request by the sponsor so that we don't have numerous expenses -- expense requests coming in from bidders who are seeking expense reimbursements.
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Page 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 good. raised. In the context of the bid that we received there was an allocation that was proposed for how overbids would be divided up between the creditors. From the debtors' perspective we think that that's We think that it's helpful and it will avoid We have received maybe ten or so, as I think we've outlined, six or eight in Mr. Derrough's affidavit. significant interest since then. work. We received
And parties are doing lots of
And this was intended to be, kind of a gatekeeping
function, for purposes of trying to manage that due diligence period. I mean, ultimately, parties will either in the form of their bid address issues like expenses or not, but the flexibility that maybe is better for the estate doesn't exist here for us to come in and seek -- to have more expenses paid to bidders. THE COURT: MR. SATHY: MR. SATHY: (Laughter) MR. SATHY: overbid allocation. THE COURT: MR. SATHY: Okay. I think that's one issue that's been Your Honor, I think I will address the Okay. Okay. In the sense that I hear you. Okay in the sense that I hear you.
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Page 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it. intercreditor disputes later, and it will encourage bidders to make bids for that pool because they know there's not going to be a fight later over who actually gets that value, which may hold up a transaction. So from the debtors' perspective -THE COURT: MR. SATHY: Right. -- we think that's great. And we endorsed
The basis of the allocation is the baseline bid in a
proportionate overbid -- overbids are allocated proportionally. We think the baseline -- again, it's -- you can have a lots of data points, you can decide whether one might be higher. think it's relatively reasonable, and I think that Mr. Derrough's affidavit, in essence, supports the basis for it. But, again, the market will determine whether or not, you know, that allocation turns out to be reasonable or not. if we seek -THE COURT: MR. SATHY: THE COURT: And ultimately the plan will. And ultimately the plan will. So for purposes of this bid, these We believe And we -I
creditors have decided that this is an allocation. it's reasonable.
Ultimately, if Appaloosa doesn't it's really
because they believe that Midland didn't fight harder for a higher allocation for the fixed pool. And that's an issue,
obviously, that permeates most of the objection. With respect to the auction I think there was a
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Page 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bids. suggestion that the auction is not appropriate in the sense that it can only be qualified bids can be participating at the auction. I think with respect to that point, Your Honor, there
was a -- that was another negotiation and I think the -- the tension is that the debtors do believe that an enterprise bid is going to create more value. we continue to. But, obviously, others have thought differently. so we've created a -- kind of a mechanism to deal with that tension. So the way it's structured right now is a bid, a And, of course, our And We do believe that, we have and
capital B bid, can be for anything.
marketing process that's going on right now can be for anything. And I think the market understands that. All of the bids we've received are non-enterprise Some for single hotels, some for larger groups. But the
market understands, and I don't think there's any evidence of market confusion, and I think that that -- Mr. Derrough's testimony would be on that point, you know, uncontroverted. So we're receiving interests that are individual larger groups, and those are bids that can -- that we will have an opportunity to evaluate. But once we get to an auction So there's a
we're going to have an apples-to-apples auction.
bid that's an enterprise and we're going to have an auction on that. And, again, if it turns out that we see or hear or
receive or negotiate different transactions which would result
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Page 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in a higher value for a particular pool then we would use the fiduciary out and decide which way to move forward. So numerous times we've talked about taking the time out, figuring out what's available, what the market suggests and then making a decision. And I think, frankly, one of the And I think we're
things we did yesterday was take a time out.
going to continue to do that consistent with the board's direction, consistent with our fiduciary out. THE COURT: All right. The only other question I
think I have is the Midland/Apollo release. MR. SATHY: THE COURT: Uh-huh. Because if I understand it correctly the
debtors, and I assume by the debtors, you tell me, is it the fixed rate and the floating rate, or just the fixed rate? MR. SATHY: THE COURT: The debtors -The debtors are paying Midland three
million dollars in exchange for Midland's -- in exchange for release of the Apollo guarantee. MR. SATHY: THE COURT: MR. SATHY: THE COURT: Right. And that's a Midland/Apollo relationship. That's correct. And it is asserted that there's a benefit
to the debtors in not having to deal with that -MR. SATHY: THE COURT: Right. -- whole thing.
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Page 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: MR. SATHY: Right. So which debtors is that? It's going to be the fixed floating In other words,
debtors, but it's an effective date payment.
the plan sponsors have agreed that on the effective date that they will direct the reorganized debtors to make that payment. So it's not a payment that's being made today, it's not a payment that's being made preconfirmation. It will be an
effective date payment that the sponsors have agreed to make. THE COURT: But that's a -- that's also something that
is up for grabs, if you will, at plan confirmation, correct? MR. SATHY: Of course. Of course it is. You know, bidders can or
As, frankly, our bidders.
can't include whatever provision they so fit -- see fit with respect to a particular transaction. MR. SATHY: THE COURT: MR. SATHY: THE COURT: Okay. All right, thank you. Okay. Maybe it makes sense to hear from either I know I'm
and/or Mr. Shiff and Mr. Sage on the 503(b) issue.
nitpicking but I just -- I'm trying to ensure that we're doing everything possible to continue to encourage interested parties to come in. MR. SHIFF: THE COURT: Good morning, Your Honor. Good morning.
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Page 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SHIFF: Adam Shiff of Kasowitz, Benson, Torres &
Friedman on behalf of Five Mile. Your Honor, I think a few points with respect to this specific provision. Needless to say, Mr. Sathy made the point
that, obviously, in the connection of multiple gives and takes, you know, this is just yet one more. I'm a bidder. And, obviously, I rise,
So needless to say, you know, the Court may view
my perspective a little different than it might from the debtors -- you know, at the debtor themselves expressing a provision. Your Honor, I think this was an imp -- a very important point to us in terms of really being a stalking horse. And, really, what is the stalking horse? In other
words, especially now, right, we've eliminated the breakup fee. So to suggest, for example, now someone else can come in now and start getting a breakup fee really, I guess, what have we gotten to by getting to this date, getting the auction off the ground and getting up and running. I think, secondly, at this point, assuming the procedures stick, and, obviously, Mr. Sathy noted that they may not stick, you're really talking about a fifty-day process right now until you have an auction. You've heard that there
are tremendous number of people knocking down their doors for all types of different bids. It doesn't seem that you need to
provide any added incentive at this point for people to do
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Page 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 process. that. And, indeed, I think it's also fair to say -- and,
again, I don't want to wander into stuff that may cross, because I don't know who's on the phone and the like. But, you
know, it is fair to say that anyone else who's bidding now does have a large benefit of six months or more of work done by our clients. And to I think sort of suggest that someone could
come in now for the last forty-five days piggyback on that and then sort of reap all those benefits, would be, you know, demonstratively unfair to us. I think you could compare and
contrast that to what we agreed with for bidder D. Bidder D we understood got in early, they drove the You saw the testimony it caused our bid to up just to So we agreed, okay, we hear you, bidder D
even to get to here. did that work.
At this point I think really it's sort of a But the price is pretty low. It's a fifty-day
price to entry a little bit.
Because a lot of the work's been done. period.
I think specifically with respect to the breakup fee provision -- I mean, here, the debtors obviously got us to waive this yesterday. So it now suggests after having put us
through those final paces, and really limited us to the most minimal bidder protections, which is really just this one expense reimbursement, it seems to us -- it really seems that it would be, you know, really unfair to let it go to anyone else. But I think maybe, more importantly to the Court,
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Page 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there's -- the people are bidding. a very short period of time. They're coming in, there's
So we really don't believe that
it would in any way inhibit the process that's being run, or the debtors' flexibility to leave it. And, you know, we also
think it provides at least the one sort of stalking horse protection, which we are now the stalking horse at least going forward, that would set us maybe apart from someone else for having done what we did. So we do believe there's an important point to continue, and we would urge the Court not to -- and I get we get into a tough issue if the Court wants to strike one provision, not others, as opposed to the package, but really to view it as part of the overall package that Mr. Sathy described, and approve it as part of, you know, the entire package. THE COURT: Well, playing devils advocate to my own
thinking out loud on the issue, it's a bid reminiscent of what I think is in one of Mr. Derrough's declarations with regard to the Lehman cash out provision. it was Mr. Bojmel, forgive me. And I think there -- or maybe The notion that someone who
wants to come in here at this level would be able to raise their own cash. So I guess kind of what I'm hearing you say is
that someone who wants to come in, and I understand your view as a bit jaundiced wearing your bidder hat. But I think maybe
what Mr. Sathy was trying to tell me was that this is not going
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Page 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and -MR. SHIFF: They're big boys, they understand that. to -- this is not chilling, it's not going to prevent someone from -MR. SHIFF: THE COURT: Right. -- coming in because they're big boys
And I think maybe -- maybe more importantly, from what you've just heard in the last twenty-four/forty-eight hours, they're doing it. I mean, it's not even like a hypothetical, maybe But you've heard both here as well as
people are coming in.
elsewhere about lots of -- let's call it, you know, frothy buzzing interest, whatever the right word is. even more so than the speculation. what you're actually seeing. THE COURT: something else? MR. SAGE: THE COURT: MR. SAGE: Shiff said. THE COURT: MR. SAGE: THE COURT: MR. SAGE: (Laughter) Of course you do. So articulate -This time. Right. Good morning. Okay. One narrow point. I endorse everything Mr. Okay. All right, thank you. Mr. Sage, So I think maybe
I think actually that's
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Page 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 all. The only thing I would add is that -- and I'm a little unclear on what the timing and procedure would be. But, you MR. SAGE: Last time was most of what we said, but not
know, part of why we wouldn't want that to happen or we wouldn't want other people's expense to be taken up is it would affect more buying. At this point we've given up a lot of our You
protections, 100 million, it sounds like a big number.
know, the more expenses the more -- the less the asset if we win, is worth. unfair. And that to me, at this point, seems a little
And to cherry pick that one provision out or because
it does make buying less valuable. THE COURT: Okay, all right. Thank you.
All right, Mr. Parkins. MR. PARKINS: Midland Loan Services. A couple of points. going to be provided. providing. First on the financing that's Lenard Parkins, Haynes and Boone for
This is not a new loan that Midland's
Midland's providing financing on its existing debt
and it's providing 622 and half million dollars so someone could step in, it will provide financing for seventy percent of an overbid if someone wants to take advantage of it. And we
think that is a very positive contribution to facilitate bidding. The seventy/thirty issues' been raised. I want to
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Page 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 talk about that. Midland, and I think just doesn't like
leverage, too much leverage has all brought us together here and all over the country. Too much leverage on deals. And
while Midland is financing 100 percent of the 622 incremental debt that's going to be used as part of the bidding, which we think attracts bidders, one of the leverages could start coming down on the deal. So seventy/thirty made sense to us, and I And I think
think seventy/thirty made sense to our advisors. seventy/thirty makes sense to the debtor.
To start bring the
leverage down in this company and for our continuing financing of the restructured debt. The 200 million dollar issue. We looked at that, and
when confronted with the issue we sat back and we talked about it, and decided whether or not we, because we're the ones who are the largest creditor here, are going to get the most benefit or get hit by virtue of having a good auction or not. We looked at this. And Mr. Greenspan's declaration's in That the issue was
evidence, it's not controverted here.
really one of is it right to have bidders come in and make an equity piece of their bid? It should all -- should bids be all
debt, was it okay to have it all debt, and people just bid on paper? And the answer was no. So the question really came down to is it right to have -- and as the numbers turned out about thirty/thirty-five percent equity come in as part of a bid. And they answer is
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Page 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that felt right, it looked right, and Mr. Greenspan's declaration speaks to that issue. What is right? People go
and buy a house, you put equity down.
People go buy real And here in order
estate, you put some equity into the deal.
to sell you can actually say you have some chance of not having to come back. Here you wanted us to have some equity in the
deal, so you didn't get upside down in the bidding here. So the seventy/thirty made sense, it happened to be the numbers that came out when you add the amount that the debtors in a plan would have to pay to Lehman, and how much extra money was being put in as equity capital, just cash part of the equity capital to pay the deal. Now, the other thing it's in Greenspan's declaration, I just want to point out, is that what does a bidder get for putting an equity piece? First of all, we don't think -- we We think bidding on just
think having equity piece is great.
debt is not sort of what you should be doing in bankruptcy because that's what got us all here. the financing provided by Midland. nineteen hotels free and clear. Is that the bidder gets The bidder also gets
And so there's nothing --
you're getting something for this money, you're getting nineteen hotels free and clear. You're getting the financing
and you're being required, pursuant to the Court order, after hearing all this stuff, to put equity in your bid. And part of
the offer to go to treatment of creditors, which has been
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Page 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 see. agreed to by Lehman is, you get this equity piece of the bid, my claims will be taken care of for 200 million dollars. Which
is, by the way, is a discount off their face amount of their debt. So I think when you look at this package, you look at the reasonableness of having an equity piece of a bid, the answer is sure. Everybody requires equity if you're a lender
to come in and make a bid to buy prop -- to by real estate. Here, you're in the right range, thirty to forty percent. That's the right range. Number two, what does the bidder get, is it incentive or disincentive for someone to come in? They get the Midland
financing, but they also get nineteen hotels free and clear. It's a cushion for the enterprise, if someone needs it, wants to finance it, needs access to cash. free and clear. It's not a bad deal. There's nineteen hotels It is a reasonable deal,
because it is reasonable to look at equity, financing and nineteen hotels free and clear. Midland concluded this auction Thank you.
ought to work, and that's why it supported it. THE COURT: All right, thank you.
All right, let's
Mr. Meyers, I don't need to hear from you, do I? MR. MEYERS: THE COURT: No, you do not. All right, Mr. Marinuzzi? Good morning, Your Honor. Lorenzo
MR. MARINUZZI:
Marinuzzi, Morrison & Foerster, on behalf of the official
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Page 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 committee of unsecured creditors. I was reminded this morning that our agreement requires me to make -- to read statements into the record, which I'll do. But before I get there, I just want to explain
where we are and how we got here. Your Honor may recall that we had filed -THE COURT: Deathtrap is out, right? I'm sorry?
MR. MARINUZZI: THE COURT:
Deathtrap is out. Deathtrap is out, correct. Okay.
MR. MARINUZZI: THE COURT:
Okay. So the issues that we raised in the
MR. MARINUZZI:
objection which we filed back in February have been resolved, and they were resolved two nights ago. Now, no surprise, the committee's job is to maximize value for unsecured creditors. So the question in a case like And the first place you
this is where do you find that value? look is to the assets themselves. sixty-five properties.
And I'm referring to the
And as encouraged as I am personally
about the events that transpired this week, I think waiting for that value to be significant enough to retire the secured debt and create a natural waterfall recovery to unsecured creditors is probably not the place -- not the basket you want to leave your eggs in. And then you look to free assets. And we conducted a
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Page 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 perfection analysis on the sixty-five properties, which took quite a bit of time because you're talking about mortgages on all the properties, assignment on all the properties. hope is to find some unencumbered assets. And the
And we found nothing
that was unencumbered, leaving the 7.4 million in cash, because I really don't consider that part of this sixty-five propertytransaction. And we've communicated that, that they've
properly perfected their security interest in those assets. Both Midland and Lehman. And then the third place you look to find value is in your challenges. And Your Honor I'm sure recalls, that way
back when there was a motion to appoint an examiner the committee indicated that we were conducting that analysis, and that's what we've done and been doing. And when you look at recoveries through that litigation naturally you always have a risk that your litigation is not going to be as successful as you hope it will be. And the starting point to really assess what your recovery's going to be is looking at your claims pool. And
we've been back and forth on what we think the unsecured claims are or will be. But Jefferies; the committee's financial
advisor, has spent quite a bit of time with AlixPartners reviewing the claims docket, the claims, the underlying data, to really try to get a better understanding of where we think
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Page 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the claims are going to be. Now, importantly, a transaction like this which assumes the franchise agreements, continues operating with the same flags, will not create rejection damage claims from the franchisors. And that's huge. Because your claims pool could
be ten times as big as it otherwise would be were that to be the case. So looking at this deal, contemplating that the claims pool is not going to be as big as it might otherwise be, the question is where do you sell? And in going back and forth
remember we were here originally with a half a million dollar offer for unsecured creditors on all of the seventy-two properties. And then we were at I think two and a half million And now we're at 3.75, the lesser
for all of the seventy-two.
of 3.75 and sixty-five percent. And in the committee's judgment, that is an excellent starting point for an auction. It's a good recovery. And, of
course, it minimizes the overall claims. So having said all that, we support the motion, we support the bidding procedures as amended with the final amendments this morning, and the plan transaction that's contemplated in the commitment letter. Now, assuming that this is ultimately the plan that's before Your Honor for confirmation, it's the same structure, the committee will prepare a letter to be submitted with the
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Page 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 see. solicitation packages urging creditors to support the plan. Now, since we do have a deal, subject, obviously, to the auction, et cetera, we've agreed that we will not seek relief from this Court to bring any claims against Lehman or Midland, which makes sense, obviously, if we have a deal. Now, what we've done, and Your Honor will see this in the cash collateral order, that I believe is going to be submitted to the Court. Remember, there's a challenge period
in there that we've amended now four times. THE COURT: Right. With respect to Lehman and Midland
MR. MARINUZZI:
that challenge period is March 29th, and it's limited to claims arising out of the 2007 transaction. they're fine with perfection. Because like I stated,
They've agreed to extend that
date through the earlier of the effective date of a plan, which assumes we don't go sideways. And twenty days after receipt by
the committee of written notice of a termination event or termination of the commitment letter. Let's see here if there's anything else I need to read into the record. No, I think those are all the points. Okay. So, Your Honor, at the end of the day
THE COURT:
MR. MARINUZZI:
we're supportive of the motion. THE COURT: All right, thank you. All right, let's
Mr. Gottesman, anything from you?
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Page 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. GOTTESMAN: THE COURT: Not today, Your Honor. Mr. Bienenstock. Martin Bienenstock
All right.
MR. BIENENSTOCK:
Yes, Your Honor.
for Dewey & LeBoeuf for the ad hoc committee. As the Court knows, we resolved our objections to the bidding procedures and the breakup fees for purposes of today. If objections are heard, it may be that some objections that are lodged today are objections that are also to the transaction, itself. And the proposed order that Your Honor
now has two decretal provisions that were the basis of our agreement for today. One decretal provision provides that all our objections are preserved for a hearing on the ultimate sale, or, if it comes up, then a confirmation hearing. Other than
those rendered moot in connection with actual bidding procedures and breakup fees, because that will have happened already. The second decretal provision in the proposed order provides that nothing in this transaction shall be conditioned on the ad hoc series C preferred shareholders releasing any entity, person, individual or anything. The reason I stand is there's one part of our agreement that was left to my stating on the record, and it's not in the proposed order, which is I think it's more along the lines of commonsense, but we didn't want it to be overlooked by
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Page 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sheet. THE COURT: MR. SATHY: Yeah. It's on page 7 of the term sheet. But accident. It is possible, it may even be likely, but it's hard
to tell at this point, that there's going to be a need at some point for some type of transition agreement because now you have the debtors' headquarters at some level overseeing management of seventy-two properties, and a joint venture interest. And under this transaction, if it closes, sixty-five So there may be a need for a transition
would be split off. agreement.
Our understanding is that if and when there is a need for that agreement it will be in agreement subject to bankruptcy court approval under Section 363, whether in a plan document or otherwise, because we want to make sure that it's fair to what the debtors call the seven sisters, and in addition to the seven sisters there's a joint venture interest. THE COURT: documents. That's reflected somewhere in one of the It's in here. It's in the term
Can you remind me where.
MR. SATHY:
I can, Your Honor.
this -- this is really an agreement to the extent that we need one. week. THE COURT: MR. SATHY: Right. First of all, we don't know if we're going And that's -- Mr. Bienenstock and I had discussions this
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Page 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 say. to need one. Second, we don't know who it's going to be
between in terms of which parties are part of a deal, and which parties are not. THE COURT: MR. SATHY: Right. Third, we don't know what it's going to
And, fourth, it's certainly not anything that needs to be
resolved today. THE COURT: Right. But it -- but you all agree that
the issue has to be dealt with. MR. SATHY: some point. We agree that there has to be something at
And if there is, when it is, and we figure it out,
we'll do it and we'll come back and we'll make sure everyone understands how that's going to happen. I just don't think We're going
there needs to be any order with respect to that. to figure this out. THE COURT: Okay.
So are you asking me to put it in
the order or the record -MR. BIENENSTOCK: THE COURT: No. No.
-- is just going to reflect -No, the record will reflect it. But
MR. BIENENSTOCK:
I do want to pick up on Your Honor's point. What's in the term sheet that Your Honor had read and Mr. Sathy just identified, gives rights to Midland/Five Mile against the debtor. They wanted to make sure that they get a
transition services agreement to their liking.
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Page 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: I understand your point. I got it.
MR. BIENENSTOCK: agreement. THE COURT:
We have an interest in that
Of course. And that's why I'm saying it will be
MR. BIENENSTOCK:
subject to our approval or a hearing under Section 363. THE COURT: All right. Now, my last comment, Your Honor, is
MR. BIENENSTOCK:
I don't want anything I said to prejudice or waive rights or the Court's thinking that it may be that the properties the preferred shareholders are interested in are subject to a sale that closes way before confirmation of this plan. So all that
stuff about transition services may -- hopefully will be moot. THE COURT: Understood. Okay, thank you. All right. Ms. Attanasio,
MR. BIENENSTOCK: THE COURT: last but not lease. MS. ATTANASIO:
Yeah, okay.
Thank you, Your Honor.
For the
record, Lee Attanasio, Sidley Austin on behalf of the Appaloosa funds. Your Honor, as the Court is presumably aware from the document we filed on Wednesday afternoon, Appaloosa's objections to the motion have been substantially narrowed. certainly pleased by the developments and the removal of the breakup fee. Although that was not one of our objections, it's I'm
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Page 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that -MS. ATTANASIO: THE COURT: Yes. certainly something we are happy to have come out of the order. Nonetheless, the objections that remain, Your Honor, are really critical and we believe they fundamentally affect what is likely to happen with bidding going forward. The debtors have put before the Court a stalking horse bid that they've assert is the best one available today. And
without revisiting how the bid was arrived at, or any of the other arguments, I think the key issue is that part of that bid is the mandated procedures going forward. And I think you
heard today that these procedures are really part of the deal and they all work together, and you can't pick them apart. I agree. Unfortunately, that's exactly the problem. And so I'd like to talk about the three procedures that we identified. How they work together. And how they give And
rise to the concerns that bidding is going to be, at least, chilled, if not precluded. THE COURT: All right, before I do that, before you do
-- just let me make clear, that even
though I'm listening to you you may not, in fact, ultimately have the right to be heard. MS. ATTANASIO: THE COURT: we'll go from there. I'm well aware of that, Your Honor.
But, nonetheless, make your record and Okay.
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Page 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. ATTANASIO: Understood. The first issue, Your
Honor, in some sense is the most innocuous, but it's for that reason that I am incredibly puzzled by why it's still in there. I've had the discussion with debtors' counsel, and I heard Mr. Sathy today, and I still do not understand a process that has been touted multiple times in multiple filings on the record as accepting any and all bids, and yet has a restriction that only allows enterprise bids into the auction room. It's -THE COURT: Subject to the debtors' fiduciary duty. And we will -- I will certainly get to
MS. ATTANASIO: that, Your Honor.
Because at the end of the day that's the
answer to all of these questions; the fiduciary out. But, Your Honor, at the end of the day that puts an extraordinary amount of pressure, on the one hand on the bidders, as they try and prepare a bid that they are being told unequivocally is not qualified to get into the auction room. And they are supposed to, I suppose, wait and find out fortyfive days from now, after they have spent time and money, whether they are going to be able to participate. And in light of the fact, particularly as to this point, Your Honor, in light of the fact that it strikes me as fairly manageable for Kirkland and Mr. Derrough to manage an auction process that might have a pool bid and might have an enterprise bid, they've done it before, we've all done it
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Page 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 before. I think this, in particular, this definitional issues,
which is sort of hidden in there, is really unnecessary. Then you get to the overbid allocation. And the
overbid allocation is unique because it takes what the debtors acknowledge is nothing more than a negotiated value split, and locks it in for bidders for all time. It is not a reflection of value, other than in the most general sense, it's a deal term. It doesn't reflect the
market test, and by virtue of the fact -- I go back to the first point, that bidders are not allowed, for purposes of an auction, to submit pool bids, you'll never know whether it's an accurate reflection of values. And for that reason, Your Honor, I think as a matter of law, these provisions are not supported under integrated. In fact, Your Honor, Midland actually uses the very restrictive aspect of the qualified bidder requirement to support the equally restrictive provision of the overbid allocation. And I'm quoting from paragraph 12 of Midland's "Any qualified
omnibus reply that was filed on March 3rd.
overbid will be for the enterprise as a whole, and not directed at particular collateral pools. With this being the case, a
potential bidder will have no reason to be concerned with how the amount of its bid is carved up amongst the various creditors." Well, that may be true, Your Honor, but the debtors
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Page 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 but -MS. ATTANASIO: I do. And the Court is obviously And we heard today which -THE COURT: I don't know if I'd call it infamous and, certainly, the fixed rate loan debtors, should care very much. And then we get to the infamous Lehman cash out
focused on it, and so have the parties.
very clearly that with this provision Lehman negotiated to either get the equity that it wants in this reorganized company or to get a substantial cash payment, and, potentially, by virtue of that cash payment, to ensure ultimately it gets the equity by making it more difficult for bidders. The first thing I would say, Your Honor, is that this provision is unprecedented certainly in my experience, and I can confirm in my associate's research as well. What else do we know about the revision? the debtors didn't want it. We know that
We know that the independent We know that every And
committee opposed it loudly and often.
constituency that weighed in on the motion objected to it. we understand Lehman's interest, which is fairly clear. THE COURT:
But they're not objecting to it anymore. They're not objecting to it anymore,
MS. ATTANASIO:
Your Honor, because their interests lie in other estates. So that's true, but I don't think it solves the
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Page 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sure. problem with the provision. So how is the provision justified? Oddly, Midland
takes the lead role here on justifying the Lehman cash out. And it does so on the basis that the provision ensures the seventy/thirty debt to capitalization ratio that we heard about. THE COURT: Well, I understand you're going to tell me
that there's other ways to accomplish that, right? MS. ATTANASIO: Yeah, that's one of the things, for
But I think the other point, Your Honor, is that if
Midland was concerned with a debt to capitalization ratio, then as the Court points out, you can have a ratio built into their willingness to provide financing, but you don't need the Lehman cash out, you have a covenant that fixes the maximum leverage ratio. THE COURT: Well, but then we're getting into a Because there's many ways And this is where -- I
discussion about business judgment. that you can structure a transaction.
mean, this is where you go to this process that took place. And the first time, the second time, maybe even the third time, the independent board said you know, we don't like this, and maybe we've been there before with the Court where something that Lehman wanted, you know, didn't fly. deal ended up. But here's where the
And putting to one side the issue of
Appaloosa's standing I think you're choosing not to cross-
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Page 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 examine or put on any evidence about the chilling effect of this provision. And I think that Mr. -- someone needs to tell
me if it was Bojmel or Mr. Derrough's observation, which one was it, about the ability to raise cash? That if somebody
wants to come into this deal we all read the newspapers, there's lots of cash out there, there's lots of capital sitting on the sidelines. And it's a big number, but in the context of
this deal, and the types of players who come into this space, I mean, I don't have a full record on this, but I'm inclined to believe -- to concur with the observation that someone could raise the cash. MS. ATTANASIO: Well, Your Honor, I guess the point I
was making is really that the seventy/thirty ratio is really a red herring. It's really a diversion. That's not what this
provision is about, it's part of the overall negotiated deal that requires that Lehman gets cash. THE COURT: I understand. And, really, I think the
MS. ATTANASIO: seventy/thirty -THE COURT:
And I have to be able to get comfortable
with it one way or the other. MS. ATTANASIO: That's correct. But what you're
hearing as why you should get comfortable with it -THE COURT: Oh, I know. -- I don't think flies.
MS. ATTANASIO:
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Page 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And here's another reason I don't think it flies. seventy/thirty leverage ratio really only matters if what you're talking about is a consolidated enterprise. are and remain separate debtors. And these The
And you heard Midland say
today, and now I'm really confused, that Midland doesn't like leverage. Except in this deal, Midland's taking 100 percent of So -I don't think those things are
the leverage.
THE COURT: inconsistent.
I mean, I think that what Mr. Parkins was saying
was that they're looking for an appropriate comfortable leverage ratio. MS. ATTANASIO: Which, again, Your Honor, might make
sense in a consolidated enterprise, or in a situation where Midland was not receiving under this deal a non-recourse note. I just -- I raise these issues, Your Honor, because what we're hearing as the justification for this provision I don't think holds water. And what it really comes down to, Your Honor, is
that it was a provision that Lehman imposed, and I don't think purely as a matter of law, forget the factual record, that it can be supported under integrated. It more than doubles the amount of cash required of a competing bidder. It does so by unnecessarily imposing a more
strict capitalization test than the Bankruptcy Code would impose. And it -- by doing so it, effectively, precludes
bidders from determining whether an eighty/twenty ratio is okay
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Page 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with them, for example. And, finally, and most importantly, it mandates a set cash recovery for an undersecured creditor in an amount that has not been tested, for which there is no record evidence. THE COURT: Oh, but we're going to be -- we're going
to have confirmation hearing. MS. ATTANASIO: We are. We are. And, again, Your The
Honor, I'll go back to the point I made the first time.
way these provisions work we're not going to have any evidence of value of individual pools or assets. Because the provisions
are designed to require enterprise bids and to lock in the value allocation. THE COURT: Well, then, I'm going to -- then the
debtors are going to have to take that risk that someone at confirmation might make that argument and prevail on it. But it brings me back to the fiduciary out. MS. ATTANASIO: Perfect, Your Honor. Because we all
understand that it's there, it's obviously a positive development from the transaction in September. But it
ultimately forces a situation where we know, both from Mr. Derrough's declarations and from what we heard in court yesterday, where there is activity of all types of bids. THE COURT: Right. I'm not going to say a lot more.
MS. ATTANASIO:
Including, and in particular, bids that are not enterprise
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Page 52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bids, to run the gauntlet of a fiduciary out. And for bidders
to know that going in with all of these strictures that they may come to the end of the process and not know whether they can play or not play on the basis of a fiduciary out. What we're going to have, potentially, is a situation where the debtors, at the end of the day, are going to have to decide if I'm reviewing a fixed rate asset pool bid only, whose fiduciary duties are relevant? THE COURT: No, I understand. It's a hard job. This
multiple debtor, multiple hats job is a hard job. MS. ATTANASIO: But it's made much harder by the
procedures they have put into place. I mean, the fact of the matter is -THE COURT: I mean, look what happened just overnight
from the last time -- just -- we haven't -- we weren't apart from each other for twenty-four hours, and we now have seven million dollars more value for the creditors of this estate, just in the last twenty hours. MS. ATTANASIO: We do, Your Honor. But as you also
saw yesterday, because of the murkiness, if you will, of some of these issues, as opposed to simply making a business judgment test, we also have what may be the threat of litigation. Which, even before these procedures were blessed, And I don't think, Your Honor, that on
you saw it yesterday.
balance when you look at these provisions the fiduciary out
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Page 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 saves the day. I think, Your Honor, it is clear that these
various terms that all work together are designed with a specific purpose, and that is to make sure that the Lehman/Five Mile bid is the winner. That is the very specific nature of
these terms, it's why they are interlocking, it's why they won't get rid of them. In every context the way this works,
the procedures ensure that no damage gets done to this deal. No pool bidding, make sure you don't pick one off. overbid allocation make sure -THE COURT: For me to agree with you, though, would No -- the
require that I find that the debtors put out a revised process letter, put out a press release, have continue to engage in all the discussions that they've engaged in, that all of that's a sham. MS. ATTANASIO: sham, Your Honor. I don't -- I'm not sure that it's a
Although, with all of those things, I come
back to the question of why a qualified bidder has to be an enterprise bid. I guess, Your Honor, at the end of the day what the debtors have told you is that this was part and parcel of the deal. And I think -- and think, frankly, that was Mr. Ruisi's That when viewed as a whole and
testimony in his declaration.
in the aggregate, the deal is the best deal for the debtors. But, the fact is, there's no example of bidding procedures out there that I'm aware of that even comes close to
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Page 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 these types of restrictions. And I dont think under these The price that is being
circumstances the balancing works.
exacted to have this stalking horse bid, particularly where we know there are other bidders out there, is simply to high. THE COURT: Okay. Briefly, but only briefly, do I Or not at all.
want to hear from anybody else. MR. MEYERS: THE COURT: MR. MEYERS: (Laughter) MR. MEYERS: figured -THE COURT: MR. MEYERS:
Your Honor, I -Oh, Mr. Meyers, we spurred you -I know what you're going to say --
I've been here for three days I
You might as well say something, right. Your Honor, I apologize, I really didn't But after listening to Mr.
intend to say anything.
Bienenstock, I sort of on e-mail was checking some documents that were flowing late, and I just want to make something real clear. For various reasons, none of which can't I get into, nor would -THE COURT: MR. MEYERS: THE COURT: MR. MEYERS: You can't bother me with. -- I would bother the Court with. All right. We decided not to object with respect to Even though
this motion at all, once Anaheim was carved out.
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Page 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we do, obviously, have an interest in the floating rate. I had told Mr. Sathy all along that this is, certainly, a reserv -- we are reserving all of our rights for the plan with respect to the floating rate mezzanine loan. he understood that. I did notice this, but the provision that Mr. Bienenstock negotiated in the order, I thought that was already implicit. But it makes that clear, but it makes that clear It says nothing in this plan will And
just for the preferreds.
prejudice the rights of the preferred to argue any -- to object to the disclosure statement, object to the plan. THE COURT: Everybody's rights are going to be
reserved in that regard. MR. MEYERS: THE COURT: MR. MEYERS: I just -So -That's what I had always felt. But when
it's an order explicit to one party I just didn't want to hear the argument that that means it precludes my client. THE COURT: that clarification. MR. MEYERS: Thank you very much, Your Honor. I'm sorry, before Mr. Sathy -If we get to that point then you can make
MS. ATTANASIO: THE COURT:
This could go on indefinitely. It won't, Your Honor. But I -- I'm
MS. ATTANASIO:
sorry to say that in my fervor over the procedures I did leave
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Page 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bidder. out the last comment, which does relate to the release provisions, generally. reminded me. Your Honor, the releases, to the extent that all parties' rights are reserved -THE COURT: They are. -- and that will be clear. Obviously, And, obviously, Mr. Meyers' comment
MS. ATTANASIO:
that's a good thing and people's ability to look at the plan as a whole in the release is, in particular, important. I still
dont understand, Your Honor, why today those releases are being mandated. THE COURT: They're always part of the -- I'm going to This goes back to the baseball bat at
quote Mr. Bojmel again.
a pickup bar famous line of his that any kind of a deal is going to have release. MS. ATTANASIO: Okay. But they are mandated for a And I think Your
And I think that's a little unusual.
Honor also touched on the Apollo/Midland release; the special servicer release. much worse. That's a variation on the problem. But it's
Because under the original motion, if you'll
recall, the benefit to that release was improved recoveries for preferreds. THE COURT: I understand. And now that's gone away.
That's gone away.
Right.
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Page 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. ATTANASIO: So now what we have is a release that
requires a payment from the reorganized -THE COURT: Debtors. -- debtor.
Right. Which, you know, putting aside my view
MS. ATTANASIO: that it's -THE COURT: relationship. MS. ATTANASIO: THE COURT:
To Midland on account of a Midland/Apollo
And --
I got it. -- putting aside the fact that I think
MS. ATTANASIO:
that number is way too low -THE COURT: I get it. -- it is --
I mean, I get it in a sense if I
understand the issue, and I think it's reserved -- it would be reserved for confirmation. MS. ATTANASIO: THE COURT: Except it's also binding --
It's part of --- on a bidder. So it's, yet, another
MS. ATTANASIO:
three million dollar hurdle for a provision that is among nondebtors. And I think that, Your Honor, is a bit
extraordinary. THE COURT: Okay, thanks.
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Page 58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. ATTANASIO: THE COURT: Thanks.
All right, we're going to put a limit on
this, because, otherwise, you guys are going to kibbitz me to death here. MR. SHIFF: Your Honor, just to be clear, as part of
our resolution with LNR, they had asked us to make one thing clear, so don't blame me, they could get up and say it, too. Okay. THE COURT: MR. SHIFF: Okay. But as Your Honor may -This is the basis for my not
UNIDENTIFIED SPEAKER: today remark, Your Honor. THE COURT: MR. SHIFF: Okay.
Just very quickly, as the Court may recall
as part of what's known as the Five Mile DIP, a portion of that DIP; tranche A, goes onto the fixed pool debtors, which is the vast majority of the DIP. And tranches B and C, which is a
much smaller piece, it's a few million dollars, actually sits on two of the seven sisters. So there was just some concern
that nothing in that -- if we file a plan, the debtors file a plan that seeks to repay the tranche A in terms of satisfying the fixed pool, that we weren't going to pull a gotcha and then say hey, the B and Cs have now been tripped, so it gets accelerated or there's some kind of, you know, default interest or the like. So I've been asked just to read the following
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Page 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 heard? MR. SATHY: Just one minute, Your Honor, I had to that confirms that. Which "Five Mile commits to provide consents required under the DIP order and/or the DIP loan documents to the extent necessary to ensure that the filing of the plan contemplated by the Five Mile Lehman commitment letter, or repayment of Tranche A of the Five Mile DIP will not cause a default, acceleration or termination of tranches B and C of the Five Mile DIP. Five Mile will work with the debtors and LNR on this issue to determine how to resolve it prior to the earlier of the filing of the plan and/or repayment of the tranche A of the Five Mile DIP." THE COURT: MR. SHIFF: THE COURT: Okay. Thank you. All right. Does anyone else wish to be
consolidate a number of requests. Your Honor, a number of provisions that Appaloosa identified were ones that we were challenged by as well. the evidence in the record is uncontroverted. But
The evidence
about what the market thinks is uncontroverted, and we were willing to put Mr. Derrough, Mr. Beilinson, Mr. Ruisi on the stand. The independent committee and the board met, albeit And,
over twenty times, and considered all of these issues.
ultimately, Your Honor, the reps -- representatives of the
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Page 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 parties who are the creditors have agreed to these provisions. The reality is it's the debtors' business judgment that's at issue, it's not Midland's and it's not anybody else's. you. THE COURT: It is 11:15. Okay. All right, thank you. Thank
I think what I'd like to do is to send And to have you come back
you to lunch for a nice long lunch. at 2 o'clock. down here. other.
Or you can call in if you don't want to stay
And I won't hold it against you one way or the
But I think the best thing for me to do for you is to give you a decision. And I've done this in some other matters,
where I'll read a decision on the record, it won't be the final form of what I'll put out for publication, but that afterwards I'll ask you for an order so that the clock can start to run. But given the fact that we have kept -- attempted to keep up with you in real time, and given the complexity of the issues, it precludes being able to give you a final finished decision this afternoon. And I think it is important to give
you a decision today, so that the debtors can move on and that you all, personally, can move on with your lives a little bit. So please come back at 2 o'clock. Mr. Bienenstock? MR. BIENENSTOCK: Your Honor, the conference I
mentioned earlier can we have that after you enter your
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Page 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 after. All right, so we're adjourned until 2 o'clock. you, folks, very much. IN UNISON: Thank you, Your Honor. Thank decision, or now, whichever -THE COURT: Yes. Well, I'd prefer it to be after,
unless someone tells me that it's going to prejudice their need to leave. So I much -MR. BIENENSTOCK: THE COURT: We're fine with it. So then I'll talk to you
All right.
(Recess from 11:17 a.m. until 2:00 p.m.) THE COURT: Please be seated.
Okay, as I described earlier this morning, I'm going to read a decision to you that is substantially final but will be finalized before it's released for publication. I'm going to try to make it flow as well as I can in that regard. Leave out some footnotes, probably some defined Because I'm simply reading a My
terms, and some other things.
decision, I'm not going to take any appearances.
understanding is that there are a number of people on the phone. Okay. Before the Court is the motion of Innkeepers
USA Trust and certain of its debtor affiliates for entry of an order (1) authorizing the debtors to enter into a commitment letter with Five Mile Capital II Pooling REIT LLC, Lehman ALI
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Page 62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Inc., and Midland Loan Services, (2) approving the new party/Midland commitment between the debtors and Midland Loan Services, (3) approving bidding procedures, (4) approving bid protections, (5) authorizing an expense reimbursement to bidder D, and (6) modifying cash collateral order to increase expense reserve. The motion. The Court assumes familiarity with the facts and circumstances of these cases and, in particular, the events leading up to the Court's September 1st, 2010 decision denying approval of the plan support agreement Innkeepers I, which decision was published by the Court on December 20th, 2010. What has transpired since Innkeepers I is exactly what is supposed to take place in a large complex Chapter 11 case. Over the course of the past five months, the debtors developed a process that, in their business judgment, was designed to address the concerns of the Court as expressed in Innkeepers I and the chorus of objections from their stakeholders. And they
have worked diligently to achieve near unanimous consensus among their stakeholders. Beginning in late September 2010 the debtors began working with their advisors to discuss and develop restructuring alternatives which would maximize value. In October 2010 Moelis & Company; the debtors' investment banker, proposed, and the board of trustees of Innkeepers USA Trust, approved a timeline for selecting a
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Page 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 stalking horse bidder. During that period the debtors
identified five stalking horse candidates, including Five Mile Capital II Pooling REIT LLC. On or before the November 23rd, 2010 deadline established by the debtors, four of the five stalking horse candidates responded with proposals. After further discussions One
with the bidders the debtors were left with two proposals. from Five Mile and Lehman ALI Inc., and one from the bidder known as bidder D. At a board meeting on December 3rd, 2010, the board selected bidder D as the stalking horse bidder, subject to
certain continuing discussions between the parties, regarding modifications to bidder D's bid. On December 11th, 2010 Five Mile Lehman informed the
debtors that it had substantially improved its proposal and that commitment letters had been signed between, (1) Five Mile and Lehman and, (2) Five Mile and Midland Loan Services. After approximately ten days of near around the clock negotiations between the debtors and Five Mile Lehman regarding modifications to certain terms of the proposed commitment letter, the independent committee of the board, and the board selected Five Mile Lehman as the stalking horse bidder. As set forth in the declaration of Mr. William Derrough of Moelis, while the debtors would have preferred the exclusion of certain provisions from the bid, the debtors
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Page 64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 determined that he Five Mile Lehman bid represented the most favorable economic proposal received by the debtors, and provided an opportunity to forge consensus among the debtors' constituents. As originally filed with the Court on January 14th, 2011, the motion sought, among other things, authorization for the debtors to enter into a commitment letter with Five Mile and Lehman which contemplated an enterprise level transaction involving the debtors' entire portfolio of seventy-one hotels. In connection with this stalking horse proposals, or the original Five Mile Lehman bid, Midland agreed to provide stapled financing to fund the Five Mile Lehman bid or any other qualified bid at the auction, which, (I) contained a debt to capitalization ratio for the reorganized enterprise of no greater than seventy percent. And, (2) provided for payment of
Lehman of no less than 200.3 million dollars in cash. Although, the original Five Mile Lehman bid was supported by Lehman as holder of the floating rate mortgage loan, and Midland as special servicer for the fixed rate mortgage loan, together comprising over one billion dollars in principle amount of debt, the chorus of objections to the motion remained loud and clear. After the filing of the motion the debtors and their advisors actively continued the marketing process. Moelis
compiled a list of potential buyers and made contact with over
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Page 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 200 of these parties, sending teasers to nearly 120 of them. The debtors also executed more than thirty non-disclosure agreements, and responded to detailed diligence requests from approximately thirty potential investors. Moelis also
contacted nine potential financing sources, four of which executed non-disclosure agreements. On January 24, 2011, the debtors circulated a more detailed and updated process letter to potential bidders. The
letter, which was also filed with the Court, further reminded potential bidders that the debtors were open to all types of proposals for the debtors' assets. The letter stated that the
debtors were willing to consider, in addition to superior enterprise base transactions all value maximizing restructuring proposals. assets. That same day the debtors also issued a widely publicized press release announcing the Five Mile Lehman bid, and the related motion and indicating the debtors' willingness to consider any and all other bids. To date, as a result of these efforts, the debtors have received multiple competing bid proposals which were described in the sealed pleadings filed with the Court. Indeed, it appears that as late as yesterday, interested parties continued to contact the debtors to express interest in the debtors' assets. The number of bids and their varying Including those for pools of assets or individual
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Page 66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 its best. structures, each of which was for less than the entire enterprise are evidence that there was no confusion in the market as to the debtors' desire to receive bids in varying forms. On February 25th, 2011, formal objections to the motion were filed by the ad hoc committee of preferred shareholders, LNR Securities Holding, LLC, Trimont Real Estate Advisors, Appaloosa Investment LP, Palomino Fund Ltd, LP, Thoroughbred Fund LP, and Thoroughbred Master Ltd, collectively "Appaloosa", CWCapital Asset Management and C-III Asset Management, together "CW", and the official committee of unsecured creditors. A statement in response to the objections Midland filed,
was filed by Apollo Investment Corporation.
one, a statement in support of the motion, two, an omnibus reply to the objections to the motion, and three, a supplemental statement in support of the motion. Five Mile
also filed a reply to the objections and a statement in support of the motion. What happens next exemplifies a Chapter 11 process at The original Five Mile bid was modified not once but
twice to remove the seven hotel properties that are secured by individual mortgages commonly referred to as "the Seven Sisters" leaving only the fixed and floating rate mortgages in the revised proposed transaction, or the revised Five Mile Lehman bid.
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Page 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The revised Five Mile Lehman bid was described for the first time in the omnibus reply in support of the motion which was filed by the debtors on March 6th, 2011. Drafts of the
revised commitment letter and bid procedures were served on the Court and the debtors' key constituents on March 8th, 2011, and the final forms of such documents were filed with the Court on March 10th, 2011. Prior to the continuation of the hearing on March 11th, 2011, the revised Five Mile Lehman bid was altered again, and the debtors submitted further revised final documents to the Court, or the final Five Mile Lehman bid which eliminated the payment of any breakup fee to Five Mile Lehman. Simply
put, the creditors and preferred shareholders spoke, and the debtors listened. It is the final Five Mile Lehman bid and related bidding procedures that are before the Court today. The final
Five Mile Lehman bid proposes the following significant terms. The bid covers only the property securing the fixedrate loan and the floating-rate loan. The debtors will
continue to market the Seven Sisters independent of the fixedrate pool and the floating-rate pool. Five Mile Lehman's equity commitments and Midland's staple financing will remain unchanged. Unsecured creditors with claims against the fixed-rate pool debtors and floating-rate pool debtors will share in a
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Page 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 distribution of up to 3.75 million dollars, but not to exceed a recovery of sixty-five percent of the face amount of allowed general unsecured claims of such debtors. Apollo will contribute 375,000 dollars, all of which will be included in the amounts distributed to unsecured creditors of the fixed-rate pool debtors and floating-rate pool debtors. Apollo will retain whatever rights it may have with
respect to the debtors and property that are not covered by the final Five Mile Lehman bid. Nothing in the Five Mile Lehman bid will impact the rights of any person or entity with respect to the 7.4 million dollars in cash that is currently held in a bank account of debtor Innkeepers USA Limited Partnership which is not subject to the final Five Mile Lehman bid. be distributed under the bid. Confirmation of the plan encompassing the final Five Mile Lehman bid will not be tied to the confirmation of any plan related to the Seven Sisters debtors. Five Mile Lehman will receive an expense reimbursement of up to three million dollars. On March 9th and 10th, 2011, each of the objecting parties filed a statement indicating to the Court whether or not it intended to pursue its objections to the motions in light of the revised Five Mile Lehman bid. Based on each of No amount of the cash will
the statements and the representations made at the hearing held
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Page 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on March 10th and 11th, only Appaloosa continues to object to the motion. follows. Appaloosa believes that the revised bidding procedures are an impediment to competitive bidding. It specifically The bases for its objection can be summarized as
asserts that the revised bidding procedures do not permit a nonenterprise bid to be qualified for the purpose of an auction, and that along with the overbid allocation, the bidding procedures restrict bidders ability to separately value and bid on pool assts. Appaloosa further contends that the Lehman cash-out provision is a further deterrent to competitive bidding and that the fiduciary out contained in the bidding procedures does not cure any of these shortcomings. Appaloosa further objects on the basis that the revised bidding procedures improperly mandate terms of a plan of reorganization. As a preliminary matter, the Court must address whether Appaloosa as an owner of certificated interest in the fixed-rate pool serviced by Midland as special servicer has standing to object to the motion, specifically standing to object the final Five Mile Lehman which now covers only the fixed-rate pool and the floating-rate pool. The issue of certain party's standing to raise objections in these cases was raised prior to the Court's
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Page 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 decision in Innkeepers I. Because the objections of Appaloosa
and others were substantially identical to many of the other objections raised at that juncture by the objectors to the debtors' plan support agreement, it was not necessary to decide the issue at that time. Because Appaloosa and Appaloosa,
alone, continues to press its objection to the final Five Mile Lehman bid in connection with the motion, the issue of its standing in these cases must now be address. On January 25th, 2011, Appaloosa filed papers with this Court in support of its status as a party-in-interest entitled to standing in these cases. In its memorandum of law,
Appaloosa asserts that its status as a holder of various interest in the debtors' cases, namely its preferred shares, its interest in a portion of one of the debtors two postpetition DIP loans, and its certificated interest in the fixedrate pool confers various rights on it as a party-in-interest sufficient to allow it to participate and be heard in the debtors' cases on any issue, including with respect to a hearing on the motion. Appaloosa also claims that in supporting the final Five Mile Lehman bid, Midland, as special servicer for the fixed-rate loan, is making commitments that place its own financial interest above those of the certificate holders, thereby rendering Midland conflicted and unable to adequately represent certificate holders.
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Page 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Finally, Appaloosa argues that the language of the noaction clause contained in the applicable servicing agreement in no way precludes or even implicates Appaloosa's participation regarding the motion as it is not taking "action" in seeking to be heard on the motion. Oppositions to Appaloosa's memorandum of law were filed by the debtors and by Midland, each of whom argues that Appaloosa, in its capacity as holders of interest in the C6 and C7 have no standing to appear and be hard in the debtors' cases with respect to the fixed-rate loan. The fixed-rate loan, which is collateralized by fortyfive of the debtors' hotel properties, is evidenced by, one, a certain replacement note, A1, and a certain replacement note, A2, each in the original principal amount of 412,701,271 dollars. The debtors' pre-petition lenders under the fixed-
rate loan transferred their interest in the A1 note to the trustee for a trust known as the C6 trust, and their interest in the A2 note to the trustee for a trust known as C7 trust. Each of the trusts is a real estate mortgage investment conduit, a REMIC, an investment vehicle that holds mortgage loans and residential and commercial mortgage-backed securities, CMBS, in trust and issues securities to investors in the secondary mortgage market in the form of certificates representing beneficial interests in these trusts. As reflected in its statement filed pursuant to
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Page 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bankruptcy Rule 2019, Appaloosa holds certificates in both the C6 and C7 trusts. REMICs are governed by pooling and servicing agreements or servicing agreements that set forth in detail the duties of the servicers that are responsible for administering the loans and allocating cash flows to different classes of certificate holders. Servicing agreements simultaneously
protect the tax treatment of REMIC trusts and also balance the sometimes conflicting interests of the various classes of certificate holders as well as those of the issuers, servicers and others. Typically, upon an event of default under a
mortgage loan held by the REMIC pursuant to the servicing agreement, such mortgage loan is transferred to and administered by a so-called special servicer appointed to represent the interest of the certificate holders with respect to that loan. The C6 and C7 trusts are governed by separate trusts are governed by separate servicing agreements. Pursuant to the
terms of the servicing agreement for the C6 trust and a separate co-lender agreement, Midland was named the special servicer for the C6 trust and is authorized to act as special servicer for both the C6 and C7 trusts. Each certificate
holder agreed to allow Midland to administer and service the fixed-rate loan in the certificate holders' collective best interest, including, where appropriate, to exercise remedies on
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Page 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 behalf of the certificate holders. Section 1.01 of the C6
servicing agreement sets forth the servicing standard which requires Midland to act in the collective best interest of the certificate holders. The C6 servicing agreement contains what may fairly be characterized as a standard no-action clause prohibiting a certificate holder from instituting any suit, action, or proceeding under the C6 servicing agreement or relating to the fixed-rate loan unless the following conditions are met: certificate holder gives the trustee under the servicing agreement written notice of a default under the servicing agreement, and B, certificate holders entitled to at least twenty-five percent of the voting rights have made a written request to the trustee to institute such suit, action, or proceeding, and the trustee has neglected to take such action for at least sixty days. The Court has not been made aware of A, a
written notice of default having been given to Midland, nor have any certificate holders entitled to at least twenty-five percent of the voting rights -- and Appaloosa falls well short of this requisite ownership amount -- made a written request to institute a "suit, action, or proceeding". During the March
10th session of the hearing on the motion, counsel for Appaloosa, in response to a direct question from the Court, confirmed that Appaloosa has not given Midland any written notice of default.
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Page 74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Section 1109(b) of the Bankruptcy Code provides that "a party-in-interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, and equity security holder, or any indenture trustee may raise and may appear and be heard on any issue in a case under this chapter." Appaloosa asserts that it has standing in
the debtors' cases under Section 1109(b) as a party-ininterest. This Court has held that a party-in-interest is one that has sufficient interest in the outcome of the case that would require representation or a pecuniary interest that will be directly affected by the case. Barn Manhattan, LLC. See, e.g., In re: Stone
Courts in this district, while generally
interpreting Section 1109(b) broadly, have limited party-ininterest standing where a party's interest in the proceeding is not a direct one. See, e.g., In re: Saint Vincent's Catholic Comcoach Corp.,
Medical Centers of New York quoting In re:
"The real party-in-interest is the one who under applicable substantive law has the legal right which is sought to be enforced or is the party entitled to bring suit." While it appears to be the case that no court has specifically addressed CMBS REMIC certificate holder standing in a Chapter 11 case, several courts have come close. example, in In re: For
Shilo Inn, 285 B.R. 726, the debtors were
twenty-seven limited liability companies which owned various
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Page 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hotel properties. Pre-petition, the debtors obtained secured
loans on the properties which were then included in pools of loans held in three trusts. The debtors filed a motion seeking
to allow the certificate holders of certain trusts to vote on a proposed plan. The debtor's filed the motion; the court denied
the debtor's motion holding that because the claims belonged to the trusts, and not to the individual certificate holders who purchased the beneficial interest in the loans as part of the asset securitization, the servicing agent for the trusts was the appropriate party to vote the trust's claims. In its
decision, the Shilo Inn court concluded that, one, the trusts and not the certificate holders, were the debtor's creditors, two, the language of the applicable pooling and servicing agreement gave the servicer the right to vote on a plan, and three, the relationship between certificate holders and trusts is distinguishable from the relationship between bondholders and indenture trustees in that in the case of a corporate bond, the bondholder has a right to payment from the corporation, whereas in a securitization, the investor's relationship is with the special purpose vehicle holding the assets, and the investor's right to payment comes from the cash generated by the assets, not from the originator of the assets itself. Judge Parris observed, with respect to the pooling and service agreements before her that, "They give the certificate holders rights to advise the special servicer and to enforce their
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Page 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rights against the special servicer and the trustee. However,
they do not give the certificate holders the right to enforce the pooled mortgage loans on their own, unless the trustee has been requested to do so and has refused." Contrary to the suggestion made by Appaloosa in its memorandum at footnote 6, Judge Peck did not render a decision on certificate holder standing in In re: Extended Stay. The
issue of whether certificate holders are parties-in-interest in Chapter 11 cases was not briefed, much less decided in Extended Stay. Moreover, the facts and circumstances in Extended Stay In
are entirely distinguishable from those present here.
Extended Stay, a special servicer had not been appointed prior to the petition date leaving the Extended Stay debtors no other option but to engage in pre-petition negotiations with certificate holders which, by necessity, continued through the first day cash collateral hearing. Here, Midland was appointed
as special servicer for the fixed-rate loan two months prior to the commencement of the debtors' cases and has been an active participant since then. In In re: Refco, Inc., Judge Drain held that the
investors in a nondebtor segregated portfolio company, or SPC, lacked standing to object to a settlement between the SPC and the official committee of unsecured creditors of the debtor because they were not a party-in-interest under Section 1109(b) of the Bankruptcy Code, regardless of their assertions that the
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Page 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement was entered into improperly by the SPC and was the product of collusion and fraud. See In re: Refco, Inc., case Judge Drain's
number 05-60006, transcript of June 8th hearing.
decision was affirmed by the district court which held on appeal that the bankruptcy court properly determined that the investors did not have standing to object as they were not a party-in-interest. In re: Refco, Inc., 2006 W.L. 3409088.
The district court also found that the investors were, "not directly and adversely affected pecuniarily by the challenged ruling of the bankruptcy court because they do not hold a direct interest in the debtor." The Second Circuit affirmed the district court's determinations that the investors did not have standing to contest the settlement between the SPC and the committee, In re: Refco, Inc., 505 F.3d 109, finding that "the party-in-
interest in the bankruptcy sense" was the SPC representing the investors' financial interest, the Second Circuit held that only the SPC, not the investors, could assert a claim against the Refco estate. The court noted that, "It may be that the
SPC directors violated their fiduciary duties by entering a settlement that was not in the best interest of investors. That issue, however, is not for the bankruptcy court." Observing that the term "party-in-interest" as used in Section 1109(b) is "broadly interpreted but not infinitely expansive," the court held that the investors as investors in a creditor of
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Page 78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the debtor were not a party-in-interest within the meaning of Section 1109(b). decision in Refco. Appaloosa holds beneficial interests in the REMIC, the C6 and C7 trusts that own the fixed rate loan, making it merely an investor and a creditor. As a result, I find that Appaloosa This Court is bound by the Second Circuit's
cannot be given party-in-interest standing to be heard on the motion, in its capacity as a certificate holder, although it does have standing to be heard in its capacity as a holder of preferred shares and as a DIP lender. In addition to Refco and
Shilo Inn, the expressed terms of the C6 servicing agreement, further support this conclusion. I note by way of footnote, as noted in its memorandum of law, Appaloosa is wearing multiple party-in-interest hats in these cases. Given that the Seven Sisters have been carved out
of the final Five Mile Lehman bid, thereby resolving the loudly voiced concerns of the ad hoc committee, TriMont, LNR, the unsecured creditors and Commonwealth, and the repayment of the debtors' DIP loans has never been remotely at risk, it is obvious that Appaloosa's remaining objections to the motion are made while wearing its certificate holder hat. The Court notes that this is not the first time that Appaloosa has attempted to circumvent a pooling and servicing agreement in order to challenge or override the actions of a CMBS special servicer. In Bank of America, NA v. PCVST Owner,
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Page 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LP or Stuy Town, Appaloosa, a certificate holder of the CMB trust in those cases, sought the right to intervene in a foreclosure action against the borrower of a secured ties mortgage loan in which the applicable documents contained a noaction clause substantially similar to the no-action clause at issue here. In that proceeding, LNR, describing itself as "the country's largest special servicer of commercial real estate loans included in CMBS transactions" filed an amicus brief arguing that individual certificate holders have no contractual right to seek to challenge the actions of a special servicer or to intervene when all certificate holders have delegated the power to exercise remedies to the special servicer. In its
brief, LNR stated that, as a special servicer, it has "a keen interest in the protection and the proper recognition of the legal rights and duties of a CMBS special servicer and in the orderly and efficient resolution and disposition of defaulted loans in the best interest of all certificate holders." LNR further argued that "individual certificate holders such as Appaloosa have no contractual right to seek to challenge or override the actions of a CMBS special servicer or to second guess through intervention the special servicer's exercise of remedies. Nor should an individual certificate
holder such as Appaloosa be permitted to intervene, when all certificate holders, including those with rights of
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Page 80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 consultation, have delegated the power to exercise remedies to the special servicer. Allowing Appaloosa to intervene in this
action would spawn satellite litigation that will clog the courts and impair recoveries to CMBS bondholders." The Stuy Town court summarily denied Appaloosa's motion to intervene which this Court believes lends even further support to its decision today. Appaloosa, as a
beneficiary of the C6 and C7 trusts, has no privity with the debtors which would confer on its standing to be heard. While
Appaloosa assets that it is not a creditor of a creditor but rather that it holds a beneficial interest in the assets of the C6 and C7 trusts, this does not change the result. As the Court pointed out in Shilo Inn, in a securitization, the investors relationship is with a special purpose vehicle holding the assets; in this case, the C6 and C7 trusts. And the right to payment comes from the cash generated
by the assets, not from the debtor as the originator of the assets itself. This comports with the Second Circuit's holding
in Refco that a creditor of a creditor is not a party-ininterest within the meaning of Section 1109(b) of the Bankruptcy Court. Moreover, this Court finds that Appaloosa is contractually bound by the no-action clause of the C6 servicing agreement. None of the conditions precedent to action has been
met such that Appaloosa is entitled to circumvent the special
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Page 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 servicer and be afforded independent standing to be heard on the motion. Despite how Appaloosa may characterize its actions
and position here, to avoid falling within the no-action clause or otherwise admit that it is precluded by the C6 servicing agreement from being heard on the motion, the fact is that Appaloosa's goal is to prevent the debtors, stalking horse transaction from moving forward, contrary to the position of the duly authorized special servicer for the fixed rate loan. Granting standing to a certificate holder would not only override the terms of the C6 servicing agreement and alter the bargain for terms and risks investor took on when they bought certificated interest in the fixed rate loan, but it would also encourage and embolden other certificate holders to hire their own counsel, to challenge the special servicer's authority and to advance their individual and conflicting pecuniary interests. This would dramatically alter the CMBS
world and render the delegation to a special servicer meaningless. In addition, it would inevitably serve to delay
and complicate bankruptcy cases as debtors are forced to litigate issues with additional parties who previously were contractually obligated to speak with one voice, that of the special servicer. The Court seeks to avoid this result here. Although
the Court's ruling with respect to standing is based entirely on controlling law as well as the applicable language of the C6
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Page 82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 servicing agreement, it is worth noting that to hold otherwise would, in the view of the Court, cause chaos in the already tumultuous CMBS market. Nor does Appaloosa's contention that
Midland is "hopelessly and impermissibly conflicted" and engaging in "self-enriching behavior" change the result. If
Appaloosa believes that to be the case, then Midland is surely acting at its peril and is answerable to Appaloosa if Appaloosa pursues an action for breach of the servicing standard. This Court finds compelling the significant check that exists regarding the conduct of servicers. The servicing
standard to which a servicer is contractually bound and which applies to Midland in this case. This standard requires a
special servicer to consider the interests of all certificate holders as a collective whole and a breach of duty may give rise to potential liability. This check on servicer conduct
does not exist to afford individual certificate holders standing in the event of an alleged breach but rather to allow them to take separate action under the terms of the applicable servicing agreement as they see fit. Should Appaloosa, as it asserts, believe that Midland is in breach of the servicing standard, it can pursue its contractual remedies. As the Second Circuit stated in Refco,
"Bankruptcy Court is a forum where creditors and debtors can settle their disputes with each other. Any internal dispute
between a creditor and that creditor's investors belongs
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Page 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 elsewhere." This Court is undaunted by Appaloosa's argument that "shutting it out of the bankruptcy case inevitably will result in litigation in other venues which ultimately will impede the implementation of a confirmable plan." In light of the
substantial consensus the debtors have achieved in the past week with respect to the final Five Mile Lehman bid, the Court is confident that the debtors can and will propose a confirmable plan for the fixed rate pool and the floating rate pool, as well as for the excluded debtors in the very near term. I will now turn to my ruling on the motion which is before the Court. The standards applicable to a motion of this
character appear in numerous decisions issued by courts in this circuit, most significantly, one, the Second Circuit's decision in In re: Lionel Corporation, two, the District Court's opinion in In re: Integrated Resources and three, the Bankruptcy Court's decision in In re: Global Crossing in which Judge Gerber discussed decisions in Lionel and Integrated Resources. In each of these decision, courts have applied a business judgment test to evaluate whether a sound business purpose justifies the use, sale or ease of property under Section 363 of the Bankruptcy Code. In Lionel, the Court of Appeals for the Second Circuit held that a proposed sale under Section 363(b) of the
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Page 84 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bankruptcy Code, outside of a plan of reorganization, should only be approved if the proponents of the sale present some articulated business justification other than appeasement of major creditors. In Integrated Resources, Judge Mukasey
concluded that the business judgment rule's presumption shields corporate decision makers and their decisions from judicial second guessing only when the following elements are present: a business decision, disinterestedness, due care, good faith and, according to some courts and commentators, no abusive discretion or waste of corporate assets. I note today -- I note that today, I evaluate only the debtors business decision in seeking approval of the stalking horse bid set forth in the final commitment letter, the bid procedures and the other relief requested it the motion. Plan
confirmation issues are not before the Court and all parties' rights are reserved in that regard. The Court finds that the
debtors have appropriately exercised their business judgment in determining to enter into the final Five Mile Lehman bid and the revised bidding procedures. The debtors have successfully
modified the initial stalking horse bid to achieve consensus among their stakeholders and the Court has found that the only remaining objector, Appaloosa, does not have standing to be heard on its objections to the motion and the final Five Mile Lehman bid. After reviewing the uncontroverted declarations of Mr.
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Page 85 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Ruisi, Mr. Derrough and Mr. Beilinson, the Court finds that the debtors have a sound business justification for entering in to the final Five Mile Lehman bid. Since Five Miles submitted its
initial proposal to the debtors in August 2010, the debtors have successfully negotiated three subsequent proposals from Five Mile or File Mile Lehman which have generated an additional appropriately one hundred million dollars in enterprise value. After months of hard fought negotiations between the parties, which continued through today, the debtors have demonstrated that the final Five Mile Lehman bid provides the best available recoveries to the fixed-rate pool and the floating-rate pool. For the reasons set forth herein the Court grants the motion and authorizes the debtors to enter into the commitment supporting the final Five Mile Lehman bid. Even if the Court
had granted standing to Apollo to be heard as a certificate holder with respect to its objections to the motion or if the Court considers Appaloosa's objections to be properly asserted in its capacity as a preferred shareholder or a DIP lender the Court finds each of these objections to be without merit for the following reasons. First, Appaloosa argues that the Specifically,
revised bidding procedures are improper.
Appaloosa criticizes one, the enterprise only limitation on bids, which mandates that all bids be structured on terms
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Page 86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 comparable to the Five Mile Lehman bid and include a debt to capitalization ratio not greater than 70 percent, two, the overbid allocation requiring competing bids to be allocated in the same manner as the Five Mile Lehman bid, and, three, the Lehman cash out provision, which requires payment in cash to Lehman of at least 200.3 million dollars, asserting that each of these provisions will improperly restrict bidders and chill bidding. The Court disagrees. I note that while ideally there would be total flexibility on each of these points in the debtors' bidding procedures the evidence in the record reveals that the debtors, by all accounts, tried, but failed, to remove the Lehman cash out provision. Notwithstanding the debtors' inability to
remove this provision the debtors have demonstrated to the Court that the other benefits of the Final Five Mile Lehman bid, including the fact that it is supported by the two largest secured creditors of the affected debtors, outweigh this concern. Even LNR's financial advisor, Mr. Ronen Bojmel of Miller Buckfire testified at his deposition, which, I note, was taken during the period in which LNR strenuously objected to the motion, that a serious bidder would not have an issue obtaining the leverage in the market to fund a cash portion of its bid as required by the bidding procedures. Similarly, Mr. Greenspan's declaration indicates that
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Page 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the no greater than seventy percent leverage ratio required for qualified bids under the final bidding procedures is, if anything, higher than what a buyer may receive in the market. According to Mr. Greenspan typical financing for hospitality assets in the current marketplace are often limited to sixty or sixty-five percent of market value. Based on the entirety of the record, including the fact that interested bidders continued to engage in discussions with the debtors through last night, the Court declines to second guess the business judgment of the debtors in agreeing to these terms. Far from being chilled, the bidding process
appears to be quite heated. Appaloosa also criticizes the process through which the Five Mile Lehman bid was obtained as flawed, due to the debtors' adherence to an enterprise level restructuring. While
the Court does not believe that the debtors' marketing process was perfect, no such process is, it was not flawed. Without
question the process has continued over an extended period of time and substantial concerns of stakeholders have been addressed as the process has evolved. The allegation that the debtors sent mixed messages which confused potential bidders as to whether parties could submit non-enterprise bids are unsubstantiated. To the
contrary, as Mr. Derrough states in his second supplemental declaration, contrary to these assertions he has seen no
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Page 88 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evidence to support a conclusion that the marketplace is confused. Mr. Derrough declares that, quote, "Many potential investors are taking advantage of the flexibility of the debtors' marketing process by working to formulate proposals either on an enterprise or non-enterprise basis. The fact that the debtors have received multiple bids
for less than the entire enterprise indicates that potential investors were quite clear that the debtors were, and continue to be, willing to accept bids in all forms." The Court also notes that the debtors' assets have been in place since September 1, 2010, the date on which the Court declined to approve the debtors' plan support agreement. Accordingly, for the past six months the market has been keenly aware of the availability of these assets as an enterprise, as pools, or individually. There is no evidence that a potential
bidder has sat on the sidelines because of the limitations on what constitutes a qualified bid because it has not had enough time, because the Lehman cash out provision is a showstopper, or because it is confused by the bid procedures and revised process letter. Bankers, by nature, are not shy, nor are investors who identify an asset that they believe is undervalued by the marketplace. Sophisticated strategic and financial buyers who
want these valuable hotel properties will step forward if they have not done so already. In that regard, should other bidders
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Page 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wish to come to the table and bid on all or a portion of the debtors' assets, the debtors still have a marketing period of forty-five days after the approval of the motion. For now, the time has come to give the market and the debtors the certainty and the rules that they need to complete the auction process and move on to plan confirmation. Moreover, as in Innkeepers I, the debtors urge that in any event there is a fiduciary out and that the debtors may and will consider any and all bids whether they are qualified bids under the revised bidding procedures or not. Unlike in Innkeepers I, however,
the fiduciary out contained in the current transaction trumps every other provision in the controlling documents. Contained
in Section 11 of the revised bidding procedures, it provides as follows, quote: "Upon the determination of the debtors' directors, trustees, or members, as applicable, and upon advice of counsel, no term or provision of the term sheet or the commitment letter shall prevent, amend, alter, or reduce the debtors' ability to exercise their fiduciary duties under applicable law." In other words, if a competing bidder submits a bid that reflects a higher return to either the fixed or the floating-rate pool or both, albeit comprised of a different mix of cash, debt and equity than that in the final Five Mile Lehman bid, the debtors can and should exercise their fiduciary
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Page 90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 duty to give it their full consideration. Finally, it is worth noting that the debtors need not have pursued an auction process at all. proceeded directly to a plan. They could simply have
They ought not to be faulted for
attempting to create a framework for additional value to be realized for creditors. See, e.g., In re Neff Corporation,
case number 10-12610, in which the debtors use of payout event procedures resulted in increased return for stakeholders from the original proposal. In that regard the Court notes that certain of the remaining objections asserted by Appaloosa and previously asserted by LNR, the ad hoc committee, TriMont and CW are best categorized as confirmation objections. For example, Appaloosa
contends that one, the final Five Mile Lehman bid and the revised bidding procedures dictate plan terms that go beyond the scope of the investment terms encompassed by the bid, two, the term sheet attached to the final Five Mile Lehman bid requires that the negotiated terms apply to any successful overbid, and, three, the release provisions are overly broad and should not be approved absent the consent of each releasing party. The Court finds that these concerns need not be addressed at this time. The debtors are asking the Court to
approve bid procedures and a stalking horse bid so that they may run an auction. The winner of the auction will simply gain
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Page 91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the right to sponsor a plan of reorganization. The proposed
plan will still be required to meet all confirmation requirements set forth in the Bankruptcy Code. Parties-in-
interest will be afforded the right to make relevant objections in the event that they believe the proposed plan falls short of such requirements. Ultimately, the transaction contemplated in the stalking horse bid or any other bid ultimately selected by the debtors will not be consummated absent confirmation of a plan. All parties' right to object to confirmation at the appropriate time are reserved and preserved. With respect to the issue of releases, while releases may be important to the ultimate success of a plan it is impossible to properly analyze the releases that have been proposed. Deciding whether a release is appropriate before a
plan has been formulated or filed has the potential to shortcircuit negotiations amongst the debtors and their creditors. It remains to be seen if the proposed releases, including the Special Servicer release, the Apollo release and the Global release are appropriate. These issues will be considered if
they are raised once a plan of reorganization is proposed. Accordingly, for all of the foregoing reasons, the motion is granted. The debtors are directed to submit an order
consistent with this decision. Okay. Any questions? All right. I thank you all
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Page 92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 very much. I'm sorry that took so long. Mr. Bienenstock, I
think we're going to act on your request for a conference at this time, and all the other parties are excused, but not without my wishing you all a very nice spring break with your respective families, and I'm also directing, Mr. Sathy, that you let Mr. Lennon go home and go to sleep. UNIDENTIFIED SPEAKER: THE COURT: Thank you. Thank you, Your Honor.
(Whereupon these proceedings concluded as 2:50 p.m.)
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Page 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
I N D E X
R U L I N G S DESCRIPTION Granting of Motion Authorizing the Debtors To Enter into the Commitment Supporting the Final Five Mile Lehman Bid PAGE LINE 85 14
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Page 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: March 14, 2011 Veritext 200 Old Country Road Suite 580 Mineola, New York 11501 I, Esther Accardi, certify that the foregoing transcript is a true and accurate record of the proceedings. C E R T I F I C A T I O N
Esther Accardi ___________________________________

Digitally signed by Esther Accardi DN: cn=Esther Accardi, c=US Reason: I am the author of this document Date: 2011.03.14 16:29:02 -04'00'
ESTHER ACCARDI (CET**D-485) AAERT Certified Electronic Transcriber
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Page 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.,

March 11, 2011 10:04 a.m.

B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE

VERITEXT REPORTING COMPANY www.veritext.com

Page 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: LORENZO MARINUZZI, ESQ.

DANIEL T. DONOVAN, ESQ. PATRICK M. BRYAN, ESQ.

ANUP SATHY, P.C.

Page 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: LAWRENCE P. GOTTESMAN, ESQ. MICHELLE MCMAHON, ESQ.

LENARD M. PARKINS, ESQ.

JOHN D. PENN, ESQ.

DEBRA J. MINOFF, ESQ. LEE S. ATTANASIO, ESQ.

DAVID C. BRYAN, ESQ. DAVID FISCHMAN, ESQ.

Page 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: TODD C. MEYERS, ESQ.

MICHAEL J. SAGE, ESQ. BRIAN E. GREER, ESQ.

ANDREW J. EHRLICH, ESQ.

HOWARD W. SCHUB, ESQ. ADAM L. SHIFF, ESQ. DANIEL A. FLIMAN, ESQ.

INNKEEPERS USA TRUST, et al.

UNIDENTIFIED SPEAKER: THE COURT: Be seated.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

All of the declarations, I believe, have been

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

This is Ms. Chen, Ropes & Gray, here as an

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

This is just an evidentiary matter.

the declaration of Mr. Icahn, is that correct?

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

All right. One point, Your Honor. I think that

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

And this is what it tells us. We have added

This is the best proposal we have.

ongoing, it's going on this week.

It's going on today.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

diligence, it's not subject to financing.

And we're comfortable that these

parties are prepared and will close.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

In many respects it has taken a I think it's a

lot longer than most of us has expected.

And, in part, You honor, that

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

servicers, one of the first things we heard was we want to opt-

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

and if we don't like it, we want to opt-out.

But in addition to that,

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

product I think of this structure.

it was very critical for Midland to provide the financing.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.

VERITEXT REPORTING COMPANY www.veritext.com