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Innkeepers is a self-administered real estate investment trust. It is the direct or indirect parent of each of the other debtors and debtors in possession. Management, having knowledge of my restructuring background, requested that I review their situation.
Innkeepers is a self-administered real estate investment trust. It is the direct or indirect parent of each of the other debtors and debtors in possession. Management, having knowledge of my restructuring background, requested that I review their situation.
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Innkeepers is a self-administered real estate investment trust. It is the direct or indirect parent of each of the other debtors and debtors in possession. Management, having knowledge of my restructuring background, requested that I review their situation.
Copyright:
Attribution Non-Commercial (BY-NC)
Verfügbare Formate
Als PDF, TXT herunterladen oder online auf Scribd lesen
SOUTHERN DISTRICT OF NEW YORK ) In re: ) Chapter 11 ) INNKEEPERS USA TRUST, et al., 1 ) Case No. 10-13800 (SCC) ) Debtors. ) Jointly Administered ) DECLARATION OF MARC BEILINSON IN SUPPORT OF DEBTORS MEMORANDUM OF LAW (A) IN SUPPORT OF CONFIRMATION OF THE DEBTORS PLANS OF REORGANIZATION PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE AND (B) IN RESPONSE TO OBJECTIONS THERETO I, Marc Beilinson, declare as follows: 1. I am the Chief Restructuring Officer of Innkeepers USA Trust (Innkeepers), a self-administered real estate investment trust organized under the laws of Maryland and the direct subsidiary of debtor Grand Prix Holdings LLC and the direct or indirect parent of each of the other debtors and debtors in possession (collectively, Innkeepers or the Debtors) in the above-captioned chapter 11 cases (the Chapter 11 Cases). Prior to 2007, I was a practicing restructuring attorney as a partner at the firm of Pachulski, Stang, Ziehl and Young with 25 years of experience. I joined the Board of Innkeepers as a trustee when Innkeepers was taken private in 2007. In advance of a November 2008 Board Meeting, management, having knowledge of my restructuring background, requested that I review their situation and provide advice pertaining to
1 The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.
2 K&E 19122405 Innkeepers situation. Thereafter, I was hired by the Board as the Chief Restructuring Officer to explore restructuring opportunities. I have previously served as an independent member of the Board of Directors of Wyndham Hotels, one of the nations largest hotel chains and an independent member of the Board of Directors and Audit Committee of
Apollo Commercial Real Estate Finance Inc., a publicly traded REIT. 2. In my role as Chief Restructuring Officer of Innkeepers, I am responsible for the management and oversight of all aspects of the restructuring and turnaround of the Debtors. I am generally familiar with the Debtors day-to-day operations, businesses, affairs, and books and records, and have played an active role in the formulation of the Debtors business plan and plan of reorganization. Accordingly, I am familiar with the terms of the Debtors plan of reorganization and the negotiation and development thereof. 3. I submit this declaration (Declaration) in support of the Debtors Memorandum of Law (A) In Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code and (B) In Response to Objections Thereto (the Confirmation Brief). 2 All matters set forth in this declaration are based on: (a) my personal knowledge or information relayed to me by Innkeepers personnel who report to me; (b) my review of relevant documents; (c) my view, based upon my experience and knowledge of the Debtors business and financial condition; or (d) as to matters involving United States bankruptcy law or rules or other applicable laws, my own experience and reliance on the advice
2 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Debtors Plans of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code [Docket No. 1445] (the Plan).
3 K&E 19122405 of counsel to the Debtors. If I were called upon to testify, I could and would testify competently to the facts set forth herein. BACKGROUND I. Company Overview, Corporate History, and Capital Structure 4. Innkeepers is a self-administered Maryland REIT that indirectly owns and operates 71 hotels. As a general business practice, the Debtors seek to affiliate their hotels with premier franchise companies and brands that offer robust marketing support and services and that have demonstrated their ability to command revenue premiums over other brands. To that end, all but nine of the Innkeepers hotels operate under franchise agreements with Marriott International, Inc. (Marriott), Hilton International, Inc. (Hilton), Hyatt Hotels Corporation, and Starwoods Hotel & Resorts Worldwide, Inc. or their affiliates. Pursuant to the franchise agreements, Innkeepers is required to fund capital expenditures to maintain and improve its hotels in a manner that satisfies the respective franchisor. Certain of these franchise agreements also require Innkeepers to fund particular property improvement programs (PIPs). A. The Innkeepers Acquisition 5. In June 2007, Apollo, through certain subsidiaries, acquired Innkeepers (the Acquisition), which was a publicly traded company whose shares were listed on the New York Stock Exchange. The Acquisition was funded with equity indirectly invested by Apollo, the assumption of certain secured debt outstanding prior to the Acquisition, and certain secured debt incurred at the time of the Acquisition. All of Innkeepers common shares outstanding at the time of the Acquisition were acquired for cash and then extinguished. Innkeepers $145 million 8% Series C cumulative preferred shares outstanding prior to the Acquisition remained outstanding after the Acquisition. In consideration for Apollos $250 million equity investment, Apollos subsidiary Grand Prix Holdings, a Debtor in these Chapter 11 Cases, was
4 K&E 19122405 issued all (except for relatively small amounts currently held by management) of Innkeepers newly issued (a) common shares and (b) Innkeepers USA Trust Preferred A Interests. B. Innkeepers Post-Acquisition Performance 6. On September 15, 2008 Lehman Brothers Holdings Inc. filed for chapter 11 bankruptcy protection, triggering a 500-point drop of the Dow. By October 11, 2008, the global financial system further suffered. The crisis spread to other industries, including the travel and hospitality industry. Coupled with an increase in supply, the economic downturn devastated the hospitality and lodging industries. As evidence of this, in 2009, RevPAR in the hotel industry experienced the largest annual decline since the Great Depression, falling by 16.7 percent. Contributing to the RevPAR decline in 2009, the industrys average daily rate, or ADR, fell by 8.8 percent, compared to a 20-year industry annual average increase of 2.8 percent. In 2009, the average daily occupancy rate decreased by 8.6 percent, compared to a 20-year industry annual average decline of 0.7 percent. The Debtors were not insulated from these declines. In 2009, the Debtors RevPAR, ADR, and occupancy rate metrics decreased by 16.3 percent, 10.8 percent, and 6.1 percent, respectively. Simply put, the scope and intensity of the decline in the hospitality industry that triggered Innkeepers liquidity issues that eventually led to its chapter 11 filing were not foreseeable events. C. Innkeepers Capital Structure 7. As of the Petition Date, the Debtors had incurred aggregate funded secured indebtedness of approximately $1.42 billion, consisting of the following: The $825 Million Fixed Rate Pool Mortgage Loan, dated as of June 29, 2007 and maturing on July 9, 2017, which loan is collateralized by 45 hotels.
5 K&E 19122405 The $250 Million Floating Rate Pool Mortgage Loan, dated as of June 29, 2007 and matured on July 9, 2010, which loan is collateralized by 19 hotels. 3
The $118 Million Floating Rate Pool Mezzanine Loan, dated as of June 29, 2007 and matured on July 9, 2010, which loan is collateralized by Grand Prix Mezz Borrower Floating 2, LLCs equity interests in the 20 hotels that are borrowers under the Floating Rate Pool Mortgage Loan. The $13.7 Million Anaheim Hotel Mortgage Loan, dated as of June 14, 2005 and matured on July 1, 2010, which loan is collateralized by the Hilton Suites in Anaheim, California. The $21.3 Million Anaheim Hotel Mezzanine Loan, dated as of June 29, 2007 and matured on July 1, 2010, which loan is collateralized by Grand Prix Mezz Borrower Term, LLCs equity interest in KPA HS Anaheim. The $47.4 Million San Diego Hotel Mortgage Loan, dated as of October 4, 2006 and maturing on November 11, 2016, which loan is collateralized by the Residence Inn in San Diego, California. The $37.6 Million Garden Grove Hotel Mortgage Loan, dated as of October 4, 2006 and maturing on November 11, 2016, which loan is collateralized by the Residence Inn in Garden Grove, California. The $35.0 Million Ontario Hotel Mortgage Loan, dated June 29, 2007 and maturing on November 11, 2016, which loan is collateralized by the Hilton in Ontario, California. The $25.6 Million Washington DC Hotel Mortgage Loan, dated as of September 21, 2006 and maturing on October 1, 2016, which loan is collateralized by the Doubletree Guest Suites in Washington, D.C. The $25.2 Tysons Corner Hotel Mortgage Loan, dated as of September 19, 2006 and maturing on October 1, 2016, which loan is collateralized by the Residence Inn in Vienna, Virginia. The $24.2 Million San Antonio Hotel Mortgage Loan, dated as of September 19, 2006 and maturing on October 1, 2016, which loan is collateralized by the Homewood Suites in San Antonio, Texas.
3 As provided in further detail in Article IV.A.7 of the Disclosure Statement, during the course of these Chapter 11 Cases, the Debtors ceased operating one unprofitable hotel that had previously secured the Floating Rate Pool Mortgage Loan.
6 K&E 19122405 8. Apollo owns all of the preferred and common equity interests in Debtor Grand Prix Holdings. Grand Prix Holdings owns substantially all of the Innkeepers USA Trust Preferred A Interests in Innkeepers USA Trust, its immediate subsidiary. Innkeepers has also issued the Innkeepers USA Trust Preferred C Interests, which are 8% cumulative perpetual preferred shares owned by non-Debtors. II. Prepetition Restructuring Efforts and Transition Into Chapter 11 A. Innkeepers Navigates the Global Economic Crisis 9. Innkeepers restructuring efforts began in 2008 in the midst of a global economic crisis that limited access to capital and customer demand for hotel accommodations. These economic effects diminished Innkeepers cash flows, forcing Innkeepers to choose between debt service and funding capital expenditures, including PIPs. Innkeepers elected not to default on its debt obligations, restricting the companys ability to fund PIPs and other capital expenditures required under its respective franchise agreements. In response, franchisors expressed increased concern over Innkeepers ability to continue to satisfy franchise agreement obligations 10. Innkeepers took proactive steps to reduce costs, restructure their business operations, and address operational cash shortfalls. At the direction of the Board, Innkeepers management team implemented the following initiatives: a company-wide labor reduction to the minimal staffing levels possible without harming guest satisfaction; a 5% salary reduction for all personnel; the renegotiation of benefit programs in an effort to lower costs (with employees share of obligations increased); substantially increased the Debtors e-commerce functionality to bolster declining revenues; the suspension of the Debtors discretionary 401(k) plan matching;
7 K&E 19122405 the suspension of distributions to Holders of Preferred C Interests beginning in December 2008; negotiations with Lehman resulting in amendments to the Floating Rate Pool Mortgage Loan Agreement and the Floating Rate Pool Mezzanine Loan Agreement, which included maturity extensions, elimination of certain guarantys, and modifications to interest rates; the reduction of certain fixed costs, including the renegotiation of maintenance, grounds cleaning, and vendor contracts; and the immediate cessation of all non-emergency capital expenditures on the hotel properties beginning in late 2008 and the related settlement for approximately $8.5 million of approximately $13.1 million of outstanding capital expenditure obligations for work performed and goods ordered. 11. The results of these efforts were positive. From 2008 to 2010, Innkeepers was able to reduce its annual costs by approximately $24 million, postponing the Debtors chapter 11 filings and providing the company time to negotiate with its franchisors and key creditors. 12. Innkeepers management team also focused on preserving Innkeepers vital relationships with franchisors, which are managed at an enterprise level to maximize long-term viability of the Debtors entire hotel portfolio. The importance of Innkeepers franchise relationships cannot be overstated. The loss of a franchise agreement for a single hotel would have had an immediate and material adverse effect on the underlying value of that hotel due to the loss of associated name recognition, marketing support, brand loyalty, and centralized reservation systems provided by the franchisor. 4 The loss of franchise agreements for numerous hotelsespecially the Generation 1 Residence Inns by Marriott for which there is no opportunity to rebrand with franchises comparable to Residence Innwould have a devastating
4 Pursuant to a Settlement Agreement entered by and among the Debtors and Marriott, dated as of August 24, 2010, and which was approved by the Court on August 31, 2010 [Docket No. 357], the Debtors and Marriott agreed to de-flag the Troy Hotel. The Troy Hotel, now operating without the Marriott brand, experienced an immediate and significant decline in revenue, noticeable only 31.5 days from de-flagging. After de-flagging, RevPar has dropped $45.50 and EBITDA dropped by over half a million dollars a year and is now negative.
8 K&E 19122405 effect on the Debtors overall business. The Debtors inability to invest in their hotel properties and the concomitant risk they would lose access to valuable brand names meant that maximizing the value of their estates required a comprehensive restructuring of the entire capital structure with the support of their franchisorsparticularly Marriott International, Inc. (Marriott), the Debtors largest franchisor, and Hilton Inns, Inc. B. Innkeepers Engages Marriott in Negotiations 13. Marriott is the franchisor for 41 of the Debtors 71 properties. Recognizing the importance of the Marriott franchise to the success of the enterprise, the management team made it a priority at the outset of the restructuring to solidify that relationship. 14. Notwithstanding previous agreements and negotiations with Marriott to expand the time period for the Debtors to complete their PIPs, the Debtors had simply been unable to comply with many of its obligations under the Marriott franchise agreements. Prepetition, the Debtors received numerous notices of potential default from their franchisors, including 23 notices of default from Marriott. The Marriott default notices stated that if the Debtors failed to perform the required PIP obligations in a timely manner, the 23 Marriott franchise agreements would terminate. 15. To avoid any such termination, management worked to ensure it would be able to fund the PIPs and other required capital expenditures on Marriott-branded hotel properties. Marriott expressed a willingness to continue its relationship with Innkeepers if Innkeepers: (a) funded a segregated account with cash sufficient to fund the completion of the Debtors outstanding PIPs, (b) provided assurance that it would have the ability to satisfy their obligations under the franchise agreements going forward, and (c) provided Marriott with daily updates regarding its restructuring efforts. Because Innkeepers needed to de-lever its balance sheet,
9 K&E 19122405 Innkeepers began to prepare to file these Chapter 11 Cases and explore debtor-in-possession financing options. C. Innkeepers Explores a Restructuring Transaction Sponsored by Lehman 16. At a time when the hospitality and lodging industry was suffering through its toughest environment in decades, Innkeepers options for third-party investments were limited, if not non-existent. Accordingly, Innkeepers focused on its current lenders, in particular, Lehman. Lehman was a natural partner for Innkeepers. First, Lehman was the lender under the Debtors second largest mortgage loan. Second, Lehman underwrote the loans for substantially all of the Debtors assets before those loans were securitized into the commercial mortgaged-back securities market. Lehman was, therefore, familiar with a significant portion of the Debtors assets. Third, unlike Midland and LNR, which would have been unable to engage in a debt-for- equity transaction due to REMIC restrictions, Lehman had the ability to complete a debt-for- equity transaction. 17. Lehman, of course, was in the midst of its own bankruptcy, and the prospect of a debtor in possession taking equity in another debtor was a highly unusual transaction. But after months of negotiations, Lehman agreed to convert its debt to equity. D. Apollo Supports Innkeepers Restructuring Efforts 18. Throughout the 2009 and 2010, Apollo supported Innkeepers restructuring efforts while Innkeepers and its advisors negotiated, among other things, the Marriott Adequate Assurance Agreement, the DIP Financings, and the use of cash collateral, and drafted first day pleadings aimed at easing the transition into chapter 11. Among other things, Apollo was willing to backstop the Debtors debtor-in-possession financing, providing the Debtors flexibility in their negotiations with other third-party lenders and reassuring Marriott that the Debtors would have access to cash to fund their PIP obligations.
10 K&E 19122405 E. Negotiations with Marriott, Lehman, and Other PartiesAnd the Resulting Series of Interrelated Agreements 19. Ultimately, Innkeepers prepetition negotiations culminated in a series of interrelated agreements that were to be implemented through the Chapter 11 Cases: the Marriott Adequate Assurance Agreement; the Plan Support Agreement; the DIP Financings; and the Cash Collateral Order. The common goal of these agreements was to de-leverage Innkeepers balance sheet, minimize interest payments and make additional cash available for operations, as well as protect the franchisors by providing funds for the PIPs and other capital expenditures necessary to retain premium brand affiliations, maintain customer loyalty, and improve Innkeepers industry market share. 1. Marriott Adequate Assurance Agreement 20. On June 25, 2010 (more than three weeks before the Petition Date), the Debtors and Marriott entered into the Marriott Adequate Assurance Agreement. Among other things, the terms and conditions of the Marriott Adequate Assurance Agreement provide that Marriott will (a) forbear from exercising its remedies under the franchise agreements, (b) forbear from seeking relief from the automatic stay, and (c) permit the Debtors to assume the franchise agreements for the Marriott hotels that have defaulted under the franchise agreements. In consideration for the foregoing, Innkeepers agreed to perform certain PIPs for the defaulted Marriott hotels according to a three-phase schedule ending November 20, 2011, and file a motion, contemporaneously with the Petition, seeking approval of DIP financing within 60 days. The agreement allowed the Debtors to avoid significant value destruction resulting from termination of their franchise agreements (subject to compliance with the agreement), maintain the Debtors valuable relationship with Marriott, and unlock substantial value of the Debtors business by reassuring franchisors, creditors, and potential investors of the Debtors business survivability.
11 K&E 19122405 2. Plan Support Agreement 21. On July 17, 2010 (two days before the Petition Date), the Debtors and Lehman entered into the plan support agreement (the Plan Support Agreement). The purpose of the Plan Support Agreement was to effectuate a restructuring that would (a) reduce the Debtors indebtedness by converting Lehmans secured debt to equity, (b) improve cash flows by significantly reducing debt service obligations, and (c) provide additional capital to facilitate the successful implementation of the Debtors business plan, including capital to complete certain PIPs. In addition, Lehman committed to support the Debtors restructuring efforts and plan of reorganization. 22. The Debtors fought hard to prevent cross-default provisions related to the approval of the Plan Support Agreement from inclusion in the Marriott Adequate Assurance Agreement and the DIP Financing agreements. 3. DIP Financing Agreements 23. In connection with the Marriott Adequate Assurance Agreement, the Debtors successfully negotiated two debtor-in-possession financing facilities (together, the DIP Financings): Five Mile, the largest certificateholder in the Debtors Fixed Rate Pool Mortgage Loan, brought to the table by Midland, was willing to provide the Five mile DIP Facility in the amount of $50.75 million to fund PIPs on certain hotels securing the Debtors obligations under the Fixed Rate Pool Mortgage Loan Agreement, the San Diego Hotel Mortgage Loan Agreement, and the Tysons Corner Hotel Mortgage Loan Agreement. Lehman was willing to provide the Lehman DIP Facility in the amount of $17 million, the proceeds of which were used to perform PIPs and other investments on certain hotels securing the Debtors obligations under the Floating Rate Pool Mortgage Loan Agreement. 24. Both DIP Financings were critically helpful to fund PIP completion and preserve and enhance value of the Debtors estates.
12 K&E 19122405 4. The Cash Collateral Order and Cash Management Order 25. Innkeepers successfully negotiated a form of order with Lehman that allowed the Debtors to continue using their consolidated cash management system and provided access to cash collateral to fund their business operations after the Petition Date. Innkeepers also worked with its other secured lenders in an effort to gain their consent prior to the filing of the Chapter 11 Cases. The Cash Collateral Order and Cash Management Order allowed the Debtors to honor their obligations to parties that provide goods and services, including the Debtors franchisors, employees, hotel management companies, suppliers of hotel-related goods and services, utilities, and taxing authorities. III. The Chapter 11 Cases 26. On July 19, 2010, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, commencing the Chapter 11 Cases. Much of the work done before the Petition Date created positive momentum for the Chapter 11 Cases. The Marriott Adequate Assurance Agreement, the DIP Financings, and the Cash Collateral Order established the necessary building blocks at the beginning of the Chapter 11 Cases to unlock value. For instance, these agreements together provided the Debtors with time and funds to complete the PIPs necessary to secure their franchises, and most significantly, the support of their franchisors. IV. Operations During the Chapter 11 Cases 27. During the Chapter 11 Cases, the Debtors operational performance has exceeded expectations. This is a direct result of the Debtors continuing efforts to cut costs and focus on ensuring the uninterrupted operation of their business through the bankruptcy filing. Since the filing, the Debtors have also directed their efforts to complying with those key agreements negotiated prepetition that are largely responsible for unlocking the value received as a result of the marketing and sale process. The Debtors have worked to accomplish a number of tasks and
13 K&E 19122405 goals, including but not limited to: (a) ensuring compliance with their PIP obligations; (b) meeting requirements under the Cash Collateral Order and ensuring that no inter-debt borrowing was required; (c) operating within the budgets established by the DIP Financings; and (d) exceeding comparable hotel performance. A. Substantial Compliance with PIP Obligations 28. Given the importance of the Debtors franchise relationships, the Debtors have spent a considerable amount of time making sure they comply with their PIP and capital expenditure requirements. The Marriott Adequate Assurance Agreement requires the completion of 23 outstanding Marriott-related PIPs by October 27, 2011. The magnitude of work required to complete the PIPs within this narrow window of time is enormous. The Debtors have been in substantial compliance with the PIP completion schedule required under the Marriott Adequate Assurance Agreement. 29. The Debtors are also subject to PIP requirements under certain of their other franchise agreements. To date, 11 PIPs have been substantially completed. Another 19 PIPs are in their initial stages. Out of the $73.0 million set aside to perform PIP work, the Debtors have spent approximately $36.4 million to date, and expect to be approximately $9.8 million under budget after the completion of all Marriott- and non-Marriott-related PIPs. B. Compliance with the Cash Collateral Order 30. There has been no material issue with the Debtors management, reporting or allocation of cash collateral. Throughout the Chapter 11 Cases, the Debtors have provided detailed reporting, including semi-weekly Flash Reports, Variance Reports, 13 Week Cash Forecasts and Application Reports (each of which as defined in the Cash Collateral Order), as well as compilation of additional data for special requests. To date, except for a few inquiries
14 K&E 19122405 about allocation and certain parties reservation of rights, there have been no disputes over allocation of costs. 31. Certain secured lenders expressed a concern regarding intercompany borrowing. Again, these concerns proved unwarranted. Through careful planning and detailed forecasting, the Debtors were not only able to avoid any inter-debt pool borrowings, but disbursed excess cash of approximately $25.4 million to the various lenders. The Debtors were able to minimize the effect of the Chapter 11 Cases on the Debtors cash management system while protecting the interests of their secured lenders and allowing the Debtors business to continue running in an efficient manner. C. Compliance with the DIP Financings 32. After the Court approved the DIP Financings, the Debtors worked diligently to close the financing arrangements. Since closing, the Debtors have ensured that their PIP completion work has stayed well within the DIP budgets. The Debtors continue to work with their DIP lenders to release funds necessary to complete the required PIPs. The Debtors have drawn on the Five Mile DIP Facility 34 times and have disbursed approximately $29.1 million of the $50.7 million budget. With respect to the Lehman DIP Facility, the Debtors disbursed approximately $5.9 million of the $17.5 million budget. D. Postpetition Operating Outperformance 33. Postpetition, the Debtors business performance has exceeded expectations through April 2011, especially with respect to cash flows. Total revenue and hotel EBITDA has improved versus last year by 6.2% and 5.9%, respectively. RevPar has increased by approximately $5.59 or 7.3% from $76.37 to $81.96. In addition to improved year over year performance the Debtors hotels have performed better than their competitive sets with the overall RevPar Index improving by 2.3% from 121.7 to 124.4
15 K&E 19122405 V. THE PLAN SHOULD BE CONFIRMED I. Classification of Claims ( 1122) 34. The Plans classification scheme reflects the Debtors capital structure, and each Class differs from each other based on relevant criteria. Valid business, factual, and legal reasons exist for classifying separately the various classes of claims and interests created under the Plan. For each Debtor and each group of Debtors, secured claims are classified separately from unsecured claims and are further divided into separate classes according to the relative priority of such secured and unsecured claims. For example, General Unsecured Claims against Fixed/Floating Debtors are classified separately from Secured Fixed Rate Pool Mortgage Claims against Fixed/Floating Debtors, which are in turn classified separately from interests in Fixed/Floating Debtors and Intercompany Claims against Fixed/Floating Debtors. 5
35. Thus, in each instance of separate classification, the Plan classifies Claims based upon their different rights and attributes. Additionally, each of the Claims or Interests in each particular Class is substantially similar to the other Claims or Interests in such Class. J. Mandatory Plan Provisions ( 1123(a)). 36. I am advised and believe the Plan meets the seven mandatory requirements of section 1123(a). 37. Article III of the Plan satisfies the first four requirements of section 1123(a) by: (a) designating classes of claims and interests, as required by section 1123(a)(1) of the Bankruptcy Code; (b) specifying the classes of claims and interests that are unimpaired under the Plan, as required by section 1123(a)(2) of the Bankruptcy Code; (c) specifying the treatment of
5 See Plan, Art. III.
16 K&E 19122405 each class of claims and interests that is impaired, as required by section 1123(a)(3) of the Bankruptcy Code; and (d) specifying that the treatment of each claim or interest within a class is the same, unless the holder of a claim consents to less favorable treatment on account of its claim or interest, as required by section 1123(a)(4). 38. Article IV and various other provisions of the Plan provide adequate means for the Plans implementation, thus satisfying the fifth section of 1123(a). Article III of the New HoldCo limited liability company agreement does not provide for non-voting securities and otherwise provides for an appropriate distribution of voting power. Finally, Article IV.W of the Plan satisfies the seventh element of section 1123(a) because the procedures for selecting officers and directors of the New HoldCo Board, as provided for in the form of the New HoldCo limited liability company agreement, 6 are consistent with the interests of creditors and equity security holders and with public policy. K. The Plan Was Proposed in Good Faith ( 1129(a)(3)). 39. I believe that the Debtors Plan was proposed in good faith with the legitimate and honest purposes of reorganizing the Debtors ongoing business and maximizing the value of each of the Debtors and the recovery to creditors and shareholders. The Debtors designed and implemented plan development and marketing processes designed to encourage participation and interest from as many financial and strategic parties as possible to serve as plan sponsors. Subsequently, the Debtors market tested their stalking horse proposal at an auction, subject to a broad fiduciary out to ensure the integrity of the process. The Debtors have continued to engage with their various constituencies throughout the Chapter 11 Cases to ensure that they
6 See Plan Supplement, Exhibit H, Art. III.3.
17 K&E 19122405 have explored all potential avenues to value maximization. As a result of these procedures and efforts by the Debtors and their professionals, the Debtors believe they have a sound basis for expecting that the proposed restructuring can be achieved. L. Disclosure of Officers and Directors ( 1129(a)(5)). 40. I believe the Plan satisfies section 1129(a)(5)(A)(i) of the Bankruptcy Code because, to the extent known, the Debtors will have disclosed the identities and affiliations of all persons proposed to serve on the New HoldCo Board and as Trustee for the Liquidation Trust at or prior to the Effective Date. Specifically, Article IV.W of the Plan provides that New HoldCo shall be managed in accordance with the New HoldCo limited liability company agreement, the form of which is included in Exhibit H of the Plan Supplement. Article IV.Y of the Plan provides for a Liquidation Trust to oversee the Wind Down of the Remaining Debtors estates. M. The Plan Is In The Best Interest of Creditors and Interest Holders ( 1129(a)(7)). 41. I understand that, pursuant to section 1129(a)(7) of the Bankruptcy Code, the Plan must satisfy the best interests test with respect to each class. I understand that, in order to satisfy the best interests test, each holder of a claim or equity interest in such class must either: (a) accept the plan; or (b) receive or retain property under the plan the value of which, as of the effective date of the plan, is no less than such holder would receive or retain if the debtors liquidated under chapter 7 of the Bankruptcy Code. 42. I believe the Plan satisfies the best interests test with respect to all Classes of claims and interests. To demonstrate satisfaction of the best interests test, the Debtors, in conjunction with their advisors, prepared a liquidation analysis estimating and comparing the range of proceeds generated under the Plan against a hypothetical chapter 7 liquidation (the
18 K&E 19122405 Liquidation Analysis). 7 As reflected by the Liquidation Analysis, all impaired classes are projected to receive a recovery under the Plan greater than or equal to their recovery under a hypothetical chapter 7 liquidation. The Liquidation Analysis also demonstrates that Holders of Allowed Claims in every Impaired Class are projected to recover as much or more under the Plan as they would receive in a chapter 7 liquidation. Based on these facts, I believe that the Plan satisfies the best interests test. The Debtors are not aware of any dispute as to whether the Plan complies with section 1129(a)(7) of the Bankruptcy Code. N. The Plan is Feasible ( 1129(a)(11)). 43. The Debtors sought chapter 11 protection because macroeconomic circumstances decreased their revenues and impaired their ability to meet their obligations. Through the sale of assets, the modification of debt obligations, and infusions of new capital, the Debtors have worked with the sophisticated counterparties to the Plans restructuring transactions to ensure economically sound business models going forward. On a consolidated basis, the transactions contemplated by the Plan together right-size the combined balance sheets of the post- reorganization Debtors by reducing debt by almost $550 million through assets sales and the turnover of a hotel. 44. In addition, the Debtors management has developed Financial Projections for the years 2011 through 2015 to further demonstrate that the Plan is feasible. 8 In general, as illustrated by the Financial Projections, the Debtors believe that their business operations will remain viable and, in fact, grow following consummation of the Plan. In addition, the Debtors
7 See Disclosure Statement, Ex. C. 8 See Disclosure Statement, Ex. B.
19 K&E 19122405 have thoroughly analyzed their ability to meet short- and long-term obligations following consummation of the Plan and, accordingly, believe that Confirmation is not likely to be followed by liquidation or the need for further reorganization. O. The Plan Meets the Requirements of Cram Down ( 1129(b)). 45. All similarly situated Holders of Claims and Interests will receive substantially similar treatment and I believe the Debtors have a reasonable basis for the Plans classification scheme. Holders of similarly situated claims and interests in the deemed rejecting impaired classes will receive the identical treatmentno distribution. Holders of Class R4B claims will each receive distributions in accordance with a Distribution Waterfall. Moreover, all claims and interests in any particular class are sufficiently related to one another. For these reasons, I believe the Plan does not unfairly discriminate with respect to the deemed rejecting impaired classes. 46. Further, I believe the Plan satisfies the absolute priority rule with respect to all rejecting impaired classes of claims and interests and is thus fair and equitable. With respect to Classes FF6, FF7, FF8, FF9, A6, A7, A8, O5, O6, O7, O8, and R5, there are no junior classes that are receiving any recovery. The only exception among the deemed rejecting impaired classes is Class R5 Intercompany Claims against the Remaining Debtors, which the Debtors have fully impaired on account of certain administrative efficiencies. As such, the Remaining Debtors Intercompany Claims, which result from the business relationships that the Remaining Debtors maintain with other Debtors in the ordinary course of business, are being eliminated. 47. Midland objected that the Plan for Debtor Grand Prix Holdings violates the absolute priority rule. The proposed form of Confirmation Order, however, will provide that Apollos interests in Grand Prix Holdings will be extinguished after all distributions are made in
20 K&E 19122405 accordance with a Distribution Waterfall and that such distributions shall not be made until all disputed claims are resolved. P. The Principal Purpose of the Plan Is Not Avoidance of Taxes ( 1129(d)). 48. I do not believe the purpose of the Plan is to avoid taxes or the application of section 5 of the Securities Act of 1933. Moreover, no party that is a governmental unit, or any other entity, has requested that the Court decline to confirm the Plan on the grounds that the principal purpose of the Plan is the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933. Q. Discretionary Contents of the Plan Are Also Appropriate 1. Debtor Releases 49. The Debtor Releases, as set forth in Articles VIII.EH of the Plan, are limited solely to Claims or Causes of Action that belong to the Debtors, and consist primarily of potential preference actions against trade creditors (Trade Preference Claims), potential preference actions against insiders like directors, officers, and shareholders (Insider Preference Claims), and potential claims against third parties arising out of the Acquisition (LBO Claims). 9
50. I am advised and understand that, early in these Cases, the Debtors advisors explored whether plausible fraudulent conveyance LBO Claims against third parties could arise out of the Acquisition. I further understand that, based on such review, the Board determined that no valuable claims existed. Pursuant to the terms of the Final Cash Collateral Order, the
9 For a discussion of Trade Preference Claims and Insider Preference Claims, see Declaration of Todd Brents in Support of Debtors Memorandum of Law (A) In Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code and (B) In Response to Objections Thereto, filed contemporaneously herewith.
21 K&E 19122405 Debtors agreed not to use cash collateral to further investigate potential LBO Claims. At the time the Debtors entered into the Final Cash Collateral Order, they believed there were no credible LBO Claims arising out of the Acquisition. 51. As described in Article IV.M of the Disclosure Statementthe Statement of the Creditors Committee, the Creditors Committee conducted its own investigation into the Acquisition. I also understand that following entry of a Court order on August 25, 2010 authorizing the Creditors Committee to take discovery pursuant to Federal Rule of Bankruptcy Procedure 2004, 10 the Creditors Committee obtained and reviewed in excess of 550,000 pages of information provided by, among others, the Debtors, Apollo, Lehman, and Midland. 52. I understand that, using this information, the Creditors Committee and its advisors performed a factual and legal review of potential claims against third parties arising out of the Acquisition. Following its investigation and analysis, the Creditors Committee negotiated a settlement with the Fixed/Floating Debtors, Five Mile, Lehman and Midland first memorialized in the Five Mile/Midland Commitment and that now includes, among other things, a $4.75 million recovery to general unsecured creditors. 11 The Creditors Committee has indicated that the settlement distribution was a preferable alternative to litigation and in the best interests of general unsecured creditors. And I understand that the Creditors Committee supports the Plan and all releases contained therein.
10 Order Permitting the Official Committee of Unsecured Creditors of Innkeepers USA Trust et al. to Conduct Rule 2004 Discovery of the Debtors and Other Parties [Docket No. 314]. 11 See Exhibit C to Exhibit 1 to the Order (I) Authorizing the Debtors to Enter into the Amended Commitment Letter with Five Mile Capital II Pooling REIT LLC, Lehman ALI Inc., and Midland Loan Services, (II) Approving the Amended New Party/Midland Commitment Between the Debtors and Midland Loan Services, (III) Approving Fixed/Floating Bidding Procedures, (IV) Approving Bid Protections, (V) Authorizing an Expense Reimbursement to "Bidder B," and (VI) Modifying Cash Collateral Order to Increase Expense Reserve [Docket No. 1009].
22 K&E 19122405 53. Based on the Creditors Committees investigation and the Debtors own review, the Debtors believe that the settlement of potential LBO Claims embodied in the Plan is fair and reasonable. 54. I understand that One East has objected to the Debtors release of LBO Claims, claiming the Debtors are gratuitously releasing potential causes of action on account of the LBO Claims. The Debtors believe that this objection is without support. The Debtors, the Creditors Committee, and the Ad Hoc Committee have each considered potential LBO Claims and determined such claims are not worth pursuing. By contrast, One East does not purport to have conducted any investigation into the validity of potential LBO Claims. 55. Based on the foregoing, it is the Debtors reasonable business judgment that the Debtor Releases are in the best interests of the Debtors estates. Further, the Debtor Releases are the product of arms-length negotiations, and are an integral component to achieving global peace in these Chapter 11 Cases. 2. Third-Party Releases 56. Articles VIII.EVIII.H of the Plan provide for the release of certain causes of action by certain non-Debtor third parties (the Third Party Releases), the inclusion of which helped enable consensus in support of the Plan. 57. I believe that the Third Party Releases are reasonable. The Third Party Releases do not release claims by governmental agencies in respect of securities laws, criminal laws, or otherwise, except to the extent such claims may otherwise be subject to the discharge granted to the Debtors under sections 524 and 1141 of the Bankruptcy Code. 12 Rather, they protect the
12 See Plan, Art. VIII.CVIII.H.
23 K&E 19122405 Plan and insulate the Debtors from indirect liability while preserving government or regulatory enforcement actions. 58. Further, the Third Party Releases are the product of arms-length negotiations in connection with the transactions and global settlement that form the basis of the Plan. I believe that the Third Party Releases constitute a good-faith settlement and compromise of claims released by the Third Party Releases, given in exchange for good and valuable consideration, as explained further below. (a) The Debtors Estates Have Received Substantial Contributions from the Releasing Parties 59. The Releasing Parties have materially contributed to the Debtors reorganization. Inclusion of the Third Party Releases in the Plan was crucial to achieving consensus in these Chapter 11 Cases. Without such releases, the Debtors and their various constituents would presently be facing a substantially contested confirmation hearing with its substantial costs and uncertainties, to the detriment of all parties in interest. Provision of the Third Party Releases enabled the Debtors to realize global peace among their key constituents and achieve a largely consensual confirmation hearing. 60. The Plan is the culmination of material consideration provided by the various Releasing Parties who are, because of the mutual nature of the Third Party Release, also the beneficiaries of those releases. For example, the Debtors have contributed substantial energy and resources to maximize the value of their estates and ensure a successful conclusion to these Chapter 11 Cases to the benefit of all parties-in-interest. Without the Debtors efforts, the Plan would likely not have resulted in its current recoveries. 61. Similarly, Five Mile, Lehman, and Midland have each made material contributions to these Chapter 11 Cases that have inured to the benefit of the Debtors estates and
24 K&E 19122405 all parties in interest. They have all been intimately involved with the Debtors restructuring process from day one, working with the Debtors to formulate a reorganization plan that would maximize the value of the Debtors estates. Affiliates of Five Mile and Lehman provided the Debtors two DIP Financings. Five Mile/Lehman provided, with Midlands support, the stalking horse bid for the Fixed/Floating Hotelsa bid that paved the way for a successful auction. And at the Fixed/Floating Auction, Five Mile/Lehman submitted numerous overbids, which contributed to the creation of additional value captured in Cerberus/Chathams winning bid. 62. Likewise, Cerberus/Chathams bid of over $1.1 billion for the Fixed/Floating Properties and Chatham L.P.s bid of $195 million for the LNR Properties have materially increased stakeholder recoveries in these Chapter 11 Cases. Indeed, the contributions of Cerberus/Chatham and Chatham L.P. form the backbone of the Plan. 63. Additionally, the Ad Hoc Committee has provided substantial consideration to the Debtors estates. For example, under the Ad Hoc Committee Agreement, the Ad Hoc Committee has agreed to waive any right to challenge the allowability of the Innkeepers USA Trust Preferred A Interests (held by the Debtors or otherwise), including any right to object to or seek to subordinate the Innkeepers USA Trust Preferred A Interests, thereby saving the Debtors estates the significant administrative costs associated with litigating that issue. (b) Third Party Releases Enjoin Claims that Would Indirectly Impact Debtors Reorganization Through Indemnity Obligations 64. The Third Party Releases preclude the pursuit of actions against the Debtors directors and officers that would trigger indemnity obligations by the Debtors estates, potentially creating substantial liabilities. The Grand Prix Acquisition Trust Amended and Restated Declaration of Trust (the Declaration of Trust) and the Grand Prix Acquisition Trust Bylaws (the Bylaws)the operative organization documents for Innkeepers USA
25 K&E 19122405 Trustcreate an indemnity obligation in favor of the directors and officers of Innkeepers USA Trust for any claim or liability to which such director or officer may become subject, in his capacity as such, excluding only acts or omissions (a) committed in bad faith or that were the result of active and deliberate dishonesty, (b) resulting in an improper personal benefit in money, property, or services, or (c) such director or officer had reasonable cause to believe were unlawful. The costs associated with such actions would drain value from stakeholders and hold up creditor distributions until the Debtors potential liabilities in connection with their indemnification obligations can be liquidated. These setbacks are precisely the problems the Third Party Releases are designed to prevent (c) The Third Party Releases Are Effectively Consensual 65. The vast majority of interested partiesincluding all secured creditors, nearly all unsecured creditors, and nearly all Holders of Series C Preferred Sharesvoted in favor of the Plan and the releases contained therein. Specifically, of the creditors and interestholders that cast a vote, approximately 99.2% of Fixed/Floating unsecured creditors, 100% of Anaheim unsecured creditors, approximately 99.98% of Ontario unsecured creditors, approximately 99.5% of Remaining Debtors unsecured creditors, and approximately 95.9% of Series C Preferred Shareholders (all in terms of amount) voted in favor of the Plan. 66. The few objections to the Third Party Releases were made on behalf of the Series C Preferred Shareholders. Because, in this specific context, the Series C Preferred Shareholders are properly subdivided into four separate categories, it is important to consider each subset individually. 67. Members of the Ad Hoc Committee: The Ad Hoc Committee supports the Plan and expressly consents to the Third Party Releases. Indeed, the Ad Hoc Committee Plan Support Letter states the Ad Hoc Committee has investigated potential claims for breaches of statutory
26 K&E 19122405 and fiduciary duties against various parties, and that it has elected not to pursue litigation because it would be protracted, costly, and uncertain. 68. Non-Ad Hoc Committee Series C Preferred Shareholders that Voted in Favor of the Plan: Approximately 79.3% of holders of Innkeepers USA Trust Preferred C Interests are not represented by the Ad Hoc Committee. Approximately 95% of holders of Innkeepers USA Trust Preferred C Interests that voted accepted the Plan. As was made clear by extensive disclosure in both the Class R-8 ballot and master ballot (as well as the Disclosure Statement), a vote in favor of the Plan is an affirmative indication of consent to the releases contained therein. Accordingly, these parties have consented to the Third Party Releases by virtue of their votes in favor of the Plan 69. Non-Ad Hoc Committee Series C Preferred Shareholders that Did Not Cast a Vote: Holders of Innkeepers USA Trust Preferred C Interests who are not represented by the Ad Hoc Committee and abstained from voting should be deemed to have consented to the Third Party Releases. The Disclosure Statement and the ballots contain clear, unambiguous language explaining the procedure for objecting to the releases contained in the Planvote to reject the Plan and timely file an objection to the Plan. Given the extensive disclosure in the ballot and master ballot, as well as the Disclosure Statementdocuments publicly filed, Court-approved, and timely served in solicitation packages to voting interestholdersholders of Innkeepers USA Trust Preferred C Interests should be deemed to have consented to the Third Party Releases. 70. Series C Preferred Shareholders that Voted Against the Plan: There is a limited group of holders of Innkeepers USA Trust Preferred C Interests holding approximately 104,130 shares that are not part of the Ad Hoc Committee and that have voted to reject the Plan (the Rejecting Series C Holders). The Debtors recently resolved the U.S. Trustees objection to
27 K&E 19122405 confirmation by agreeing that the Rejecting Series C Holders would not provide a release to, or receive a release from Apollo 71. I understand that One East has objected to confirmation of the Plan on grounds that certain of the Third Party Releases render the Plan unconfirmable. I understand that these objections focus on the non-consensual release by the Rejecting Series C Holders of claims against: (1) Apollo, and (2) the Debtors directors and officers. 72. I believe that the resolution of the U.S. Trustees objection should also resolve the One East objection as it relates to the Apollo release. And despite One Easts assertions to the contrary, the Third Party Releasesincluding the Rejecting Series C Holders release of the Debtors directors and officers and Apollo contained in the Remaining Debtor Releaseare appropriate. 73. The Remaining Debtor Release is supported by substantial consideration provided by Apollo. Apollo agreed to support the Ad Hoc Committee Administrative Claima payment that reduces Apollos potential recovery as holders of 100% of the equity interests in Grand Prix Holdings by approximately $1.4 million. By doing so, Apollo enabled the Debtors to avoid contentious litigation with the Ad Hoc Committee and to save the substantial costs associated therewith. Consensus is a primary goal of Chapter 11 and Apollos agreement to support the Ad Hoc Committee Administrative Claim advanced that goal. 74. Apollo provides material contributions to the Fixed/Floating Plan, including a $375,000 payment to the Fixed/Floating general unsecured claim fund, at a time when Apollo believed it was getting global releases in exchange for the contribution. When the Remaining Debtors split off into a separate Planthereby reducing the scope of the releases in the Fixed/Floating Plan rather than withdrawing its contribution, which would have been within its
28 K&E 19122405 rightsApollo remained committed to making the $375,000 payment. Apollos actions preserved consensus with respect to the Fixed/Floating Plan and helped pave the path for the massively successful auction for the LNR Properties encapsulated in the Remaining Debtor Plan. 75. The Debtors directors and officers likewise provided substantial consideration to the Debtors estates. Indeed, throughout these Chapter 11 Cases, the Debtors directors and officers have been integral in preservingand even substantially increasingthe value of the Debtors estates. 76. The Debtors management helped ensure the Company would be able to sufficiently fund the PIPs and other required capital expenditures on Marriott-branded hotel properties in order to secure Marriotts support throughout the restructuring process. Such support was and continues to be critical to preserving estate value. 77. Recognizing the need to deleverage the Debtors balance sheet and create additional cash flows necessary to satisfy PIP and other obligations, the Debtors management also engaged in months of negotiations with Lehman to persuade Lehman to accept a debt-for-equity transaction. 78. Furthermore, as a result of the Debtors management team maintaining their efforts to cut costs and focus on ensuring the uninterrupted operation of the Debtors business through the bankruptcy filing, the Debtors operational performance has exceeded expectations throughout these Chapter 11 Cases. 79. And, since the filing, the Debtors directors and officers have worked hard to ensure the Debtors continue to comply with the key agreements with Marriott and Lehman negotiated prepetition that are largely responsible for unlocking the substantial value received as a result of the marketing and sale process.
29 K&E 19122405 80. Finally, the Debtors ran the marketing process for all of their assets, on both enterprise and non-enterprise level bases. Beginning in September, the Independent Committee of the Board and the full Board conferred numerous times to formulate a successful sale process, including determining the selection of the best stalking horse bidder. Prior to the bid deadline, the Debtors directors and officers spent considerable time negotiating with and responding to diligence requests from various potential bidders creating a competitive tension that served to increase the value of bids ultimately submitted. J. Injunction and Exculpation 81. I believe that the Exculpation Provision in Article VIII.I of the Plan is appropriate. The Exculpated Parties played a critical role in the formulation of the Plan and the Exculpation Provision played a role in bringing these parties to the table. Further, the scope of the exculpation is limited to the Exculpated Parties participation in these Chapter 11 Cases, has no effect on liability that results from gross negligence or willful misconduct, and does not apply to any acts or omissions expressly set forth in and preserved by the Plan. 82. Article VIII.J of the Plan enjoins all Entities from commencing or continuing any Causes of Action released pursuant to the Plan or Confirmation Order. I believe the injunction is necessary to effectuate the releases contained in the Plan and protect the reorganized Debtors from any potential litigation from prepetition creditors as they implement the provisions of the Plan after the Effective Date. Any such litigation would hinder the efforts of the reorganized Debtors to effectively fulfill their responsibilities as contemplated in the Plan and thereby to maximize value for all Holders of Claims and Interests. I believe the injunction is narrowly tailored to achieve its purpose.
30 K&E 19122405 K. The Ad Hoc Committee Agreement is Appropriate 83. Section IV.AA of the Plan provides a $3.5 million payment to the members of the Ad Hoc Committee (the Ad Hoc Committee Payment) in the Remaining Debtors Plan. I understand that the crux of all disputes surrounding the Ad Hoc Committee Payment is the appropriateness of the amount of the Ad Hoc Committee Payment that exceeds the Ad Hoc Committees reasonable legal fees and expenses. 84. As further detailed in the paragraphs 34-45 of the Derrough Declaration, the Ad Hoc Committees participation in the Debtors restructuring process materially benefitted the Debtors estates and constituents. Therefore, the Debtors believe that allowance and payment of the Ad Hoc Committee Administrative Claim is appropriate given the substantial benefits provided to the Debtors by the Ad Hoc Committee and an appropriate use of estate assets. 85. Further, the business judgments made by the Debtors in connection with agreeing to seek approval of the Ad Hoc Committee Administrative Claim have all been made based on a lengthy consideration of the relevant facts and options and for rational business purposes. The Debtors agreement to pay the Ad Hoc Committee Administrative Claim avoids a potential delay of emergence from Bankruptcy by avoiding a contested Confirmation process and costly, residual litigation. Avoiding disputes regarding the allowability of the Innkeepers USA Trust Preferred A Interests, objections to the Chatham Hotel Sale Transaction and the marketing process that led to it, the resolution of Causes of Action against the Debtors trustees and/or management related to the Chapter 11 Cases, and other objections to the Confirmation and Consummation of the Plan minimizes the potential for delay and diminished recoveries, and substantially reduces costs related to a plan that has the support of over a billion dollars of Claims.
31 K&E 19122405 86. The reduction of potential costs is considerable. Because of the large number of professionals who are compensated by the Debtors estates, the average monthly cost to the Debtors Estates for the compensation and reimbursement of professionals is approximately $4.4 million. Each month of these Chapter 11 Cases thus comes at a steep price. If litigation were necessary to bring these Chapter 11 Cases to a conclusion, it is likely that the costs of the litigation would be high. Given prior litigation costs in these cases, it is reasonable to estimate that the Stipulation and the Ad Hoc Committee Agreement (conditioned on the Ad Hoc Committee Payment) will save the Debtors estates several hundreds of thousands of dollars (if not millions) of litigation expenses that otherwise may have been necessary before these Chapter 11 Cases could be concluded. L. The Debtors Purchase of a D&O Tail Insurance Policy 87. Section IV.U of the Plan provides that on the Confirmation Date of the Fixed/Floating Plan, the Debtors are authorized to extend their directors and officers liability insurance policies (the D&O Liability Insurance Policies) by entering into tail policies that would provide coverage for an extended six-year claims reporting period (the Tail Policies). The Debtors have obtained estimates from their existing insurers for the Tail Policies that provides for the identical type of claim and coverage limits as are provided under the existing D&O Liability Insurance Policies. The Tail Policies provide an aggregate amount of $30 million coverage for an aggregate one-time premium presently estimated to be approximately $620,276 for the six-year term, subject to a potential reduction of such premium for any unearned premium on the existing D&O Liability Insurance Policies. 88. The insurance being acquired through the Tail Policy is identical in coverage to that which currently exists. The only modification to the policies is with respect to the extension of the coverage period. The Debtors believe that the Premium for the Tail Policy is modest in
32 K&E 19122405 the context of these cases and is fair and reasonable in light of the market rate for such policies and the potential exposure to indemnity claims by the estates if the Tail Policy is not purchased. Therefore, the Debtors have determined it is an appropriate exercise of their business judgment to purchase the Tail Policy. Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing is true and correct. Dated: June .:f.J 2011 K&E 19122405 Respectfully submitted,
Marc Beilinson Chief Restructuring Officer Innkeepers USA Trust