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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK


Hearing Date: September 30, 2010
Hearing Time: 10:00 a.m.
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In re

INNKEEPERS USA TRUST, et al.,

Debtors.

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Chapter 11
Case No. 10-13800 (SCC)
(Jointly Administered)

OBJECTION OF THE UNITED STATES TRUSTEE TO
MOTION OF AD HOC COMMITTEE OF PREFERRED SHAREHOLDERS FOR
AN ORDER DIRECTING THE APPOINTMENT OF AN EQUITY COMMITTEE
TO: THE HONORABLE SHELLEY C. CHAPMAN,
UNITED STATES BANKRUPTCY JUDGE:
Tracy Hope Davis, the United States Trustee for Region 2, in furtherance of the duties
and responsibilities set forth in 28 U.S.C. Sections 586(a)(3) and (5), hereby files her objection
to the Motion of the Ad Hoc Committee of Preferred Shareholders (the Ad Hoc Committee)
for Order Directing the Appointment of an Equity Committee pursuant to Bankruptcy Code
Section 1102(a)(2) (the Motion). ECF No. 435.
SUMMARY STATEMENT
The Motion should not be heard because the Ad Hoc Committee has not complied with
Bankruptcy Rule 2019(a). If the Court decides to hear the Motion, it should be denied because
the Ad Hoc Committee has not shown that the appointment of an official equity committee is
warranted. Specifically, the Ad Hoc Committee has failed to meet its burden to establish that
preferred shareholders are not adequately represented or that there is a substantial likelihood of a
meaningful recovery to them. Accordingly, the United States Trustee, in the exercise of her
discretion under Bankruptcy Code Section 1102(a)(1), declined to appoint an equity committee
shortly before the filing of the Motion, and the Motion should be denied.
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BACKGROUND
General Background
1. On July 19, 2010 (the Petition Date), Innkeepers USA Trust (Innkeepers) and
certain of its affiliates (collectively, the Debtors) filed voluntary petitions for relief under the
Bankruptcy Code.
2. The Debtors own and operate a portfolio of 72 hotels located in 20 states across
the United States. Declaration of Dennis Craven, Chief Financial Officer of Innkeepers USA
Trust, in Support of First Day Pleadings (the Craven Declaration) at 6, ECF No. 2.
3. Since the Petition Date, the Debtors have operated their businesses and managed
their properties as debtors in possession pursuant to Bankruptcy Code Sections 1107 and 1108.
By Order dated January 7, 2009, the Debtors cases are being jointly administered. ECF No. 51.
4. On July 28, 2010, the United States Trustee, pursuant to Section 1102(a)(1) of the
Bankruptcy Code, appointed the official committee of unsecured creditors (the Creditors
Committee). ECF No. 82.
The Debtors Pre-Petition Corporate and Capital Structure
5. Innkeepers is a self-administered real estate investment trust. Craven Declaration
at 17. Innkeepers indirect, wholly owned limited liability company subsidiaries, which are
also the Debtors in these cases, hold title to, or ground leases in, the Debtors 72 hotel properties.
Id.
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6. In June 2007, Apollo Investment Corporation (Apollo) acquired all of
Innkeepers common shares (the Apollo Acquisition). Id. at 23. Preferred holdings of
Innkeepers known as Innkeepers $145 million 8% Series C Cumulative Preferred Shares, which
were outstanding at the time of the Apollo Acquisition, remained outstanding after the Apollo
Acquisition. Id. In connection with Apollo Acquisition, Apollos subsidiary, Grand Prix
Holdings, LLC, a debtor in these cases, was issued all (except for a small amount issued to
management) of Innkeepers (a) common shares and (b) 12% Series A Cumulative Preferred
Shares (a different tranche of preferred holdings). Id.
7. The Debtors total liabilities of $1,518,827,295.00 exceed the $1,500,066,327.00
book value of the Debtors assets. Id. at Exhibit E. The Debtors liabilities include
approximately $1.29 billion of property-level secured debt. Id. at 25.
8. Forty-five (45) of the Debtors hotels secure fixed rate mortgage loans in the
aggregate principal amount of $825 million. Id. at 26. The loans have been securitized and
sold into the commercial mortgage-backed security market. Id.
9. Twenty (20) of the Debtors hotels secure floating rate mortgage loans in the
principal amount of $250 million. Id at 28. Grand Prix Mezz Borrower Gloating 2, LLC, the
100% owner of the Debtors that own these twenty (20) hotels, has also used its equity interest in
those Debtors as collateral for a $118 million floating rate junior mezzanine loan. Id.
10. The Debtors remaining seven (7) hotels secure an aggregate of $230 million in
funded pre-petition debt. Id. at 29 - 37.
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The Ad Hoc Committee
11. According to the Verified Statement of the Ad Hoc Committee pursuant to
Bankruptcy Rule 2019(a) (the 2019 Statement), the Ad Hoc Committee consists of (1)
Brencourt Credit Opportunities Masters Ltd, (2) Esopus Creek Value LP and (3) Plainfield
Special Situations Master Fund II Limited, who collectively are holders of 24% of Innkeepers
8% Series C Cumulative Preferred Shares. 2019 Statement, ECF No. 205. The preferred shares
held by these entities were purchased both before and after the commencement of the Debtors
cases. Id. The members of the Ad Hoc Committee, however, have not disclosed the exact dates
upon which they acquired their shares, including the dates and number of shares purchased after
the commencement of these cases, or the amounts paid therefor, and any sales or other
disposition thereof. Id.
12. The Ad Hoc Committee has retained Dewey LeBoeuf, LLP as counsel. ECF No.
176.
13. On August 11, 2010, the Ad Hoc Committee filed a motion seeking the
appointment of an examiner (the Examiner Motion). ECF No. 179. A hearing on the
Examiner Motion is currently scheduled for September 30, 2010, the same day as the hearing on
this Motion.
The Request for an Equity Committee
14. On July 28, 2010, the United States Trustee received a letter (the Letter) from
Dewey LeBoeuf, on behalf of Esopus Creek Advisors and FMR LLC, requesting the United
States Trustee to appoint an equity committee consisting of holders of the 8% Series C
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Cumulative Preferred Shares in Innkeepers (the Preferred Shareholders). A copy of the Letter
is attached hereto as Exhibit 1. The Letter was supplemented by a letter dated August 11, 2010
and an email dated August 19, 2010 (collectively, the Supplements). The Supplements are
annexed hereto as Exhibits 2 and 3, respectively. According to the August 11, 2010 letter,
Plainfield Asset Management joined the request for an equity committee. See Exhibit 2.
15. The entities on whose behalf the Letter and Supplements were written are not the
members of the Ad Hoc Committee. See Exhibits 1 and 2; see also 2019 Statement.
16. In the Letter and Supplements, the shareholders asserted that because Innkeepers
is solvent, and the Preferred Shareholders lack adequate representation, the United States Trustee
should appoint an equity committee of Preferred Shareholders. See Exhibits 1-3.
17. Though the decision whether to appoint an equity committee is within the
discretion of the United States Trustee, her counsel forwarded the Letter and the Supplements to
counsel for the Debtors and the Creditors Committee, and requested their clients views
regarding the request for the formation of an equity committee.
18. Counsel for the Debtors provided letter responses dated August 10, 2010, August
17, 2010 and August 23, 2010 (collectively, the Debtors Responses). The Debtors
Responses are attached hereto as Exhibits 4, 5 and 6, respectively. In the Debtors Responses,
the Debtors asserted that there is no credible evidence of the Debtors solvency, and the interests
of equity holders are already adequately represented. See Exhibits 4-6.
19. Similarly, counsel for the Creditors Committee provided letter responses dated
August 10, 2010, August 17, 2010 and August 23, 2010 (the Committees Responses). The
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Committees Responses are attached hereto as Exhibits 7, 8 and 9, respectively. The
Committees Responses echoed the Debtors position that (i) there is no credible evidence of the
Debtors solvency, and (ii) the interests of equity holders are already adequately represented.
See Exhibits 7-9.
20. On August 30, 2010, based upon the Letter and Supplements requesting the
appointment of an equity committee, the Debtors Responses, the Committees Responses, as
well as the facts and circumstances of these cases, the United States Trustee declined to appoint
an equity committee in these cases. See Exhibit 10.
21. On September 13, 2010, the Ad Hoc Committee filed the Motion seeking this
Court to order the appointment of a committee of Preferred Shareholders.
DISCUSSION
I. The Court Should Not Hear the Motion Because There Has Been No Compliance
with Bankruptcy Rule 2019
The initial Letter requesting an equity committee was made on behalf of Esopus Creek
Advisors and FMR LLC. See Exhibit 1. Plainfield Asset Management later joined in the
request. See Exhibit 2. The 2019 Statement, however, lists Brencourt Credit Opportunities
Masters Ltd, Esopus Creek Value LP and Plainfield Special Situations Master Fund II Limited,
as the members of the Ad Hoc Committee. ECF No. 205. The discrepancy in the parties seeking
an equity committee is at best confusing and makes it difficult to determine the identity of the
requesting parties.
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The applicable portion of Bankruptcy Rule 2019(a) provides as follows:
(a) Data Required. In a chapter 9 municipality or chapter 11 reorganization case, except
with respect to a committee appointed pursuant to 1102 or 1114 of the Code [an official
committee], every entity or committee representing more than one creditor or equity security
holder . . . shall file a verified statement setting forth
(1) the name and address of the creditor or equity security holder;
(2) the nature and amount of the claim or interest and the time of acquisition thereof
unless it is alleged to have been acquired more than one year prior to the filing of the petition;
(3) . . . in the case of a committee, the name or names of the entity or entities at whose
instance, directly or indirectly, the employment was arranged or the committee was organized or
agreed to act; and
(4) with reference to the time of . . . the organization or formation of the committee . . .
the amounts of claims or interests owned by . . . the members of the committee . . . the times
when acquired, the amounts paid therefor, and any sales or other disposition thereof.
Fed.R.Bankr.P. 2019(a).
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The Ad Hoc Committee has not disclosed in its 2019 Statement the exact dates upon
which they acquired their preferred shares, including the dates and number of shares purchased
after the commencement of these cases, or the amounts paid therefor, and any sales or other
disposition thereof. See 2019 Statement. These deficiencies are violations of Bankruptcy Rule
2019(a). See Bankruptcy Rule 2019(a);
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see also In re Northwest Airlines Corp., 363 B.R. 701
(Bankr. S.D.N.Y. 2007); In re Northwest Airlines Corp., 363 B.R. 704 (Bankr. S.D.N.Y. 2007).
Accordingly, until and unless the Ad Hoc Committee fully complies with Bankruptcy Rule
2019(a), the Court should refuse to permit the Ad Hoc Committee to be heard further in these
cases. See Rule 2019(b).
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II. The Motion Should Be Denied
Under Bankruptcy Code Section 1102(a)(2), the Court has the discretion to order the
appointment of an equity committee. Official Comm. v. Finova Group, Inc. (In re Finova Group,
Inc.), 383 B.R. 64, 70 (D. Del. 2008). In determining whether to appoint an equity committee,
the Court is required to find that the appointment of an equity committee is necessary to assure
adequate representation of . . . equity security holders. 11 U.S.C. 1102(a)(2); In re Johns-
Manville Corp., 68 B.R. 155, 159 (S.D.N.Y. 1986). This threshold test imposed by the statute,
see In re Oneida, Ltd., 351 B.R. 79, 83 (Bankr. S.D.N.Y. 2006), reflects the statutory policies
implemented in Bankruptcy Code Section 1141(d)(1)(B), which provides that unless a plan of
reorganization or confirmation order provide otherwise, the confirmation of a reorganization
plan by a bankruptcy court terminates all rights and interests of equity security holders [ ]
provided for by the plan. 11 U.S.C. 1141(d)(1)(B).
Accordingly, the appointment of committees of equity security holders in chapter 11
cases is the rare exception, rather than the rule. In re Williams Commcns Group, Inc., 281
B.R. 216, 223 (Bankr. S.D.N.Y. 2002). The moving party bears the burden of establishing that
the tenets of Section 1102(a) have been met; specifically the proponents must establish the
inability to represent their interests without an official committee and the substantial likelihood
of meaningful recovery. Id.
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A. The Ad Hoc Committee Has Not Shown Inadequate Representation.
Section 1102(a)(2) does not set forth a test of adequate representation, so the Court must
examine the facts of each case. Johns-Manville, 68 B.R. at 159; see also In re Beker Indus.
Corp., 55 B.R. 945, 948 (Bankr. S.D.N.Y. 1985) (adequate representation is not defined in the
statute, but requires interpretation by the Court).
The statutory focus of Section 1102(a)(2) is not whether the shareholders are
exclusively represented, but whether they are adequately represented. Williams Commcns,
281 B.R. at 223. In this analysis, the bankruptcy courts consider a number of non-exclusive
factors in determining whether there is adequate representation, including the debtors
insolvency, the number of shareholders, the complexity of the case, and whether the cost of the
committee would significantly outweigh the concern for adequate representation. Johns-
Manville Corp., 68 B.R. at 159-60.
Generally, not every case with public share-holders warrants an equity committee. In
re National R.V. Holdings, Inc., 390 B.R. 690, 698 (Bankr. C.D. Cal. 2008) (denying
appointment of equity committee because insolvency not proven). Specifically, while there is a
large number of shareholders, not every case with such a large number will require an official
equity committee. Williams Commcns, 281 B.R. at 223.
When a corporate debtor remains in possession, its directors bear the same fiduciary
responsibilities to creditors and shareholders as would a bankruptcy trustee, if one was
appointed. Indeed, the willingness of courts to leave debtors in possession is premised upon an
assurance that the officers and managing employees can be depended upon to carry out the
fiduciary responsibilities of a trustee. Commodity Futures Trading Commission v. Weintraub,
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471 U.S. 343, 355 (1985) (citing Wolf v. Weinstein, 372 U.S. 633, 649-652 (1963)).
In the instant case, it is clear that the Preferred Shareholders are adequately represented.
First, the Ad Hoc Committee has retained Dewey & LeBoeuf, a well known law firm whose
attorneys are experienced with bankruptcy cases. See ECF No. 176.
Second, since the Petition Date the Ad Hoc Committee, through Dewey & LeBoeuf, has
actively participated in these cases. Indeed, based upon the record, it appears that the Preferred
Shareholders have demonstrated that they are adequately represented.
Specifically, in addition to filing the Motion for an equity committee, the Ad Hoc
Committee has filed the Examiner Motion, which involved their participation in extensive
discovery and several court hearings. See ECF No.179. The Ad Hoc Committee also filed a
response to the objections to the Examiner Motion. See ECF No. 330. The Ad Hoc Committee
also filed an objection to the Debtors motion for authority to assume a plan support agreement
and enter into DIP financing, see ECF No 269, actively participated in discovery, see e.g.,
Debtors Objection to Appoint Examiner at 10, ECF No. 285, and actively participated in the
trial on that motion. To the extent that the Ad Hoc Committee continues to play an active role,
and depending on the ultimate outcome of these cases, the Ad Hoc Committee, if it makes a
substantial contribution to the cases, may seek an award of their expenses under Bankruptcy
Code Section 503(b). Accordingly, the Ad Hoc Committee is free to proceed in these cases with
its current representation, but the estates will not be obligated to bear the corresponding cost
unless the Court so determines at a later time.
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B. The Ad Hoc Committee Has Not Established that There is an Economic Interest to
Protect.
Equity committees should not be appointed unless equity holders establish that there is a
substantial likelihood that they will receive a meaningful distribution in the case under a strict
application of the absolute priority rule. Williams Commcns, 281 B.R. at 223. In this regard,
section 101(32) requires a balance sheet test. In re Nirvana Restaurant, Inc., 337 B.R. 495,
506 (Bankr. S.D.N.Y. 2006.). If the debtor is a going concern, fair valuation means the fair
market value of the debtors assets that could be obtained if sold in a prudent manner within a
reasonable period of time to pay the debtor's debts. Id., quoting Lawson v. Ford Motor Co. (In
re Roblin Indus., Inc.), 78 F.3d 30, 35 (2d Cir.1996).
The analysis starts with a review of the balance sheet, with the recognition that book
value does not always provide a fair estimate of market value. Nirvana, 337 B.R. at 506. Book
values, however, may still support a court's inference of an entity's insolvency in some
circumstances. In re Flutie New York Co., 310 B.R. 31, 52 (Bankr. S.D.N.Y. 2004) (quoting
Roblin Indus., 78 F.3d at 36. Other evidence of insolvency can be found in SEC filings and
accompanying financial statements, including (1) reports of negative net worth, (2) statements or
figures that show sustained losses; (3) facts that show that the debtor is operating in a depressed
market, and (4) reports of failure to pay bank debt. Roblin Indus., 78 F.3d at 37. Whenever
possible, [however], a determination of insolvency should be based on reasonable appraisals or
expert testimony. Id., at 38.
The Ad Hoc Committee has fallen short of meeting its burden to establish that there is a
substantial likelihood that there will be a meaningful distribution to equity. Williams
Commcns, 281 B.R. at 223.
2
The Ad Hoc Committee points to Bank of America v. 203 North LaSalle Street
Partnership, 119 S. Ct. 1411 (1999) to support its proposition. That ruling, however, concerns
plan confirmation issues, not the appointment of an equity committee.
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First, as noted above, the Debtors liabilities exceed the book value of the Debtors
assets. See Craven Declaration at Exhibit E.
Second, the Ad Hoc Committee, in asserting that there may be equity value for the
Preferred Shareholders, points to seven Debtor-owned hotel properties, and a non-debtor joint
venture, Genwood Raleigh, LLC, that are not encumbered by a blanket mortgage, but rather only
by individual mortgages. See Motion at 27. The Debtors that own the respective seven hotel
properties are KPA RIMV, LLC, 10-13886 (SCC), KPA RIGG, LLC, 10-13885 (SCC), KPA HI
Ontario, LLC, 10-13881 (SCC), KPA Washington DC, LLC, 10-13889 (SCC), KPA Tysons
Corner RI, LLC, 10-13888 (SCC), KPA San Antonio, LLC, 10-13887 (SCC), KP HS Anaheim,
LLC, 10-13882 (SCC). Id at 29. However, the seven hotels are encumbered by an aggregate
total of $230 million in funded pre-petition secured debt. See Exhibit 6 at 2-3. The Creditors
Committee, whose interests are aligned with the Ad Hoc Committee to maximize value,
however, does not believe there is any equity value in these seven hotels. See Exhibit 9 at 2.
Moreover, according to the Debtors 2015.3 Statement (the 2015.3 Statement), the liabilities of
the non-debtor joint venture referenced in the Motion, Genwood Raleigh, LLC, exceed the value
of its assets. See 2015.3 Statement, ECF No. 415.
Finally, the Ad Hoc Committee asserts that even if all of the Debtors properties are fully
encumbered, there is still value in the ability to control the Debtors properties. Motion at 32.
Not only is this value speculative, but the Ad Hoc Committee does not point to a single reported
decision that uses this new standard in the context of appointing an equity committee.
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Rather,
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the Ad Hoc Committees bald assertion runs counter to the law in this District that, as noted
above, holds that an equity committee should not be appointed unless equity holders establish
that there is a substantial likelihood that they will receive a meaningful distribution in the case
under a strict application of the absolute priority rule. Williams Commcns, 281 B.R. at 223.
In this regard, Section 101(32) requires a balance sheet test. In re Nirvana Restaurant, Inc.,
337 B.R. 495, 506 (Bankr. S.D.N.Y. 2006.). Fully encumbered property fails the balance sheet
test in determining whether to appoint an equity committee. [PKS - please add cite]
The Ad Hoc Committee has not met its burden to establish that there is a meaningful
economic interest to protect from the perspective of equity. Accordingly, the appointment of an
equity committee is not warranted at this time.
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CONCLUSION
For the foregoing reasons, the United States Trustee requests that the Court not hear the
Motion; if the Court decides to hear the Motion, than the Court should deny the Motion, and
sustain the United States Trustees objections.
Dated: New York, New York
September 21, 2010 TRACY HOPE DAVIS
UNITED STATES TRUSTEE
By: /s/ Paul K. Schwartzberg
Trial Attorney
33 Whitehall Street, 21st Floor
New York, New York 10004
Tel. No. (212) 510-0500
Fax. No. (212) 668-2255
EXHIBIT 1
DEWEY & LF BoEUF
Bv Email m1d Bv Hand
Ms. Tracy Hope Davis
United States Trustee- Region 2
Office of the United States Tmstee
33 \:Vhitehall StTeet, 21st floor
New York, NY 1 0004
July 28,2010
Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, NY 10019-6092
tel +1 212 259 8530
fax +1 2'12 259 6538
mbienenstock@d!.com
Re: In re .Innkeepers USA Ttust, et al. ("Innkeepers"), Chapter 11 Case No.
10-13 800 (SCC) -- Request for Appointment of Statutory Committee of
Prefeued Shareholders
Dem Ms. Davis:
On behalf of the prefeued shareholders listed in the footnote below,
1
we request the
United States Tmstee to appoint a statutory preferred shmeholders' committee representing the
preferred shmeholders holding interests in Innkeepers, pmsuant to 11 U.S.C. 11 02(a)(l )-(2/
and 28 U.S.C. 586(a)(5). The reasons for this request me as follows:
1
This letter is on behalf of funds owning approximaiely 15.3% of Innkeepers' Series C cumulative preferred shares,
which funds are managed by:
1. Esopus Creek Advisors; and
2. FMR LLC.
2
Bankruptcy Code section 1102(a)(l)-(2) provide:
1102. Creditors' and equity security holders' committees
(a)
(1) Except as provided in paragraph (3), as soon as practicable after the order for relief under
chapter l 1 of this title, the United States trusme shall appoint a comminee of creditors holding
unsecured claims and may appoint additional committees of creditors or of equity security holders
as the United States trustee deems appropriate.
N E.WY OR I< [LONDON MUl TINA T IONALP ARTNERSH I P[WASHI N DC
ALnANY\ALMA'YII-\USTIN]BEIJING\BosToNlBRUSSELS\CHARLOTit:ICHICAGo!DusAt
Fr<.ANKFURTjHARTFORD]HONGI<ONG!HousTONjJ,.\CI<SONVILLE!JOHANNESBURG j LosANGEi...ES Moscow!
PAR:Sil.WLTiNA"!ONALPARTNtRSHIP; ROME i SAN FRANCISCO I SILiCON VALLEY I WAP.SAW
Ms. Tracy Hope Davis
United States Trustee - Region 2
July 28, 2010
Page 2 of 4
Innkeepers is Likelv Solvent as Corroborated bv Innkeeper s First Dav Affidavit. befr1re
Addinsc the Value of its Noncore Assets and Causes of Action. Paragraph 22(a) oflm1keepers'
amended first day affidavit sworn to by Dem1is Craven, its chief financial officer. treasurer, and
vice president provides: "The Debtors' consolidated assets for 2009 totaled approximately $1.5
billion and consolidated liabilities totaled approximately $1.5 billion." Significantly, the Debtors
provided consolidated numbers. If. however, any one oflm11ceepers' multiple subsidiaries has
equity value, there may well be equity for the preferred shareholders because the parent company
is not liable for all the consolidated debt of all the entities. Moreover, after a 31% drop,
Innkeepers' EBITDA for 2009 was still $85 million (down from $123 million in 2008). !d. We
are advised that an ebitda multiple for comparable high-end companies would show solvency,
and the likely results for 2010 would show substantial equity value. Notably, hmkeepers
corroborates its strong business this year and bright future: "While the global economic crisis
has certainly affected the hospitality industry, and thus the Debtors' business and overall
revenue, the Debtors' operations remain strong and significant opportunities remain for the
business in the future." I d. 7. Significantly, neither the balance sheet values nor the ebitda
numbers include any value for Innkeepers' causes of action.
Finally, Im11<eepers' controlling owner, Apollo Investment Corporation ("Apollo" or
"AIC"), is already plmming a reorganization under which it takes for itself the opportnnity to
procure half ownership of the reorganized Innkeepers. Tellingly, neither Innkeepers' initial first
day affidavit, nor its motion for authority to obtain debtor-in-possession finm1cing, nor its motion
for an order approving its plan support agrec:1nent divulge objective in s
chapter 11 case to provide Lehman, as lender, full ovvnership of the reorganized debtor subject to
Ale's acquisition of half of it. Rather, Midland Loan Services, Inc., as special servicer
("Midland"), filed an objection dated July 19, 2010 to lm1keeper's financing motion and
disclosed (in paragraph 15) what it lemned about Apollo's objective from Im11,eeper's chief
restructuring officer
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Innkeepers also filed m1 an1ended first day affidavit verified July 19, 2010
(2) On request of a party in interest, the comi may order the appointment of additional committees
of creditors or of equity security holders if necessary to assUre adequate representation of cred'itors
or of equity security hoiders. The United States trustee shall appoint any such cornminee.
1
Paragraph 15 of Midland's objection dated July J 9, 20 I 0 provides:
"As described in the Craven Declaration, the Debtors state plainly that they have
"successfully negotiated a consensual, integrated restructuring transaction" supported by a Plan
Support Agreement (the "PSA") between the Debtors and Lehman ALl, lnc. ("Lehman"). ln
addition to the PSA, the Debtors represent that the restructuring includes the Five Mile DIP and
the Marriott Agreement. See Craven Declaration at p. 6. Under the PSA, Lehman has agreed to
support a plan in which Apollo, as Midland has been advised by the Debtors' chief restructuring
officer, will receive 50%> of the reorganized Debtors' equity in what amounts to a ne\v value plan
with every other creditor taking a massive haircut.''
Ms. rracy Hope Davis
United Stares Trustee- Region 2
July 28. 2010
Page 3 of 4
that, tongue in cheek provides: "It is the Debtors' understanding that, subject to ceriain terms
and conditions. AIC may become the purchaser."
Preferred Shareholders oflnnkeeners Lack Anv Representation pursuam to ll U.S.C. S
J l02(a)(2). This is not a case in which the debtor-in-possession's management and directors
represent the interests of shareholders. To the contrary. Innkeeper's motion dated July 19, 2010
for approval of its plan support agreement (a) provides prefened and common shareholders shall
be extinguished with no distributions.
4
and (b) fails to divulge that Apollo plans to procure haJJ
the reorganized debtor for itself. Moreover, Apollo nowhere discloses that the debtor-in-
possession financing Innkeepers is requesting is to be used in part to make improvements in
hotels that Apollo had guaranteed and Midland is suing Apollo to enforce. Midland Objection
dated July 19. 2010 to Innkeepers financing motion. a t ~ ! 9n.l 0. In sum, Apollo. as shareholder.
is attempting to deliver the company to Lehman, as long as Apollo procures half ownership of
the reorganized company. Innkeepers' unsecured claimholders and shareholders aTe sacrificed to
malce the plan so attractive to Lehman that it will let Apollo procure half the company at a price
attractive to Apollo.
Preferred Shareholders were Deprived of Basic Protections. Notably, after Innkeepers
missed 6 preferred dividend payments, the prefened shareholders were entitled to designate a
director. Neither Apollo nor Innkeepers enabled that to happen. Additionally. Apollo delisted
and deregistered Innkeepers, thereby depriving the prefened shareholders of the protections of
Sarbanes Oxley, inclusive of public disclosures.
The foregoing are just a few examples that show a pervasive lack ofrepresentation.let
alone adequate representation, of preferred shareholders. As shown above, Innkeepers'
management and directors are affirmatively attempting to extinguish preferred shareholders,
while Apollo uses Innkeepers to design a new investment for itself.
Time is of the Essence. On the first day of its chapter ll case, Innkeepers filed its
motions dated July 19, 2010 for approvals of its plan support agreement and its financing
anangements. While both are complicated, suffice it to say that Apollo and Innkeepers are
attempting to put in place their plan in such a manner that no one can change it. They attempt to
accomplish that objective by providing in the plan support agreement that events that would
derail Innkeepers proposed plan will result either in stay relief enabling Lehman to seize
4
Paragraph S(e) oflnnkeeper's plan support motion provides:
"(e) holders of interesis in the Debtors._ including common and preferred stock,
receiving [receive] no distTibutions on account of such interests, with sucb interests
being cancel1ed."
l\1s. Tracy Hope Davis
United States Trustee- Region 2
July 28, 2010
Page 4 of 4
Innkeepers' hotels or in lm1keepers having to sell the hotels serving as Lehman collateral
pursuant to Bankruptcy Code section 363
5
Needless to say, Innkeepers is attempting to put its
proposed plan in concrete before the comi can determine value or can run a marketing process.
In sum, Apollo and Innkeepers are attempting to orchestrate a private sale to Lehman and Apollo
without satisf)ing any requirements for a private sale.
We respectfully submit that these cases compel the appointment of a statutory committee
representing Irmkeepers' preferred shareholders. Moreover, time is of the essence because
dispositive orders could be entered on Innkeepers' pending motions any day. Additionally, the
unsecured claims in tbe case are very small, in comparison to the secured mortgage debt and the
preferred shares. Therefore, the unsecured claimholders do not as a practical matter have an
incentive to vindicate their rights and certainly have no incentive to protect preferred
shareholders. Innkeepers' race to lock in its plan creates an emergency. Failure of preferred
shareholders to be represented now, cannot be remedied later because the foregoing dispositive
motions are pending.
Thank you for considering this request Please feel free to contact me with any questions
at your convenience.
MJB/ds
5
Section 8(b)(i)-(ii) of the Plan Support Ab'Teement provides the two remedies as follows:
(i) The Company will be deemed to have consented to the modification of the automatic stay to
permit Lehman to exercise any and all remedies with respect to the Floating Rate Collateral, the
automatic stay shall be so inodif1ed and no further Bankruptcy Court approval shall be required; or
(ii) The Company will sell the Floating Rate Collateral pursuant to section 363 of the Bankruptcy
Code, subject to the following conditions, which shall be incorporated into any order approving
this Agreement: (i) the sale procedures shall be agreed upon no later than 120 days after the
Petition Date: (ii) Lehman shall have the
right to credit bid the Floating Rate Debt; (iii) if sale proceeds are nm paid to Lehman within 60
days of the Tennination Event, title to the Floating Rate Collateral shall be conveyed to Lehman
fiee and clear of all liens, claims and encumbrances; (iv) tbe 60-day period shall not be extended
and the Company waives its right to seek any extension such period.
EXHIBIT 2
DEWEY & LEBOEUF
By Email and Bv Hand
Ms. Tracy Hope Davis
United States Trustee - Region 2
Paul K. Schwartzberg, Esq.
Office of the United States Trustee
33 Whitehall Street, 21st floor
New York, NY 10004
August 11, 2010
Dewey & LeBoeuf LLP
1301 Avenue ofthe Americas
New York, NY10019-6092
tel +1 212 259 8530
fax +1 212 259 6538
mbienenstock@dl.com
Re: In re Innkeepers USA Trust, et al. ("Innkeepers"), Chapter 11 Case No.
10-13800 (SCC) -- Request for Appointment of Statutory Committee of
Preferred Shareholders
Dear Ms. Davis and Mr. Schwartzberg:
To date, neither Innkeepers nor the statutory creditors' committee has provided us copies
of their responses to our letter of July 28, 2010. Nevertheless, we submit this letter to provide
further corroboration that there is likely equity value for Innkeepers' preferred shareholders. By
this letter, we also advise you that Plainfield Asset Management, as a preferred shareholder, also
supports the appointment of a statutory preferred shareholders' committee.
Apollo's Admission. First, Apollo's SEC filing on May 26,2010 admits there is equity i11
the preferred shares. Apollo's Form !OK filed on May 26,2010, provides that Apollo's
preferred equity interests in Grand Prix (ostensibly pari passu with the preferred shares held by
members of the Ad Hoc Committee) had a value of$5,268,000 as of March 31,2010. See
Apollo Investment Corp Form 1 0-K For The Fiscal Year Ended March 31, 2010 at 55-56. This
value set forth in the May 26, 20 l 0 filing clearly took into consideration the fact that Innkeepers
and its affiliates would restructure because: (a) in January 2010, Innkeepers released a statement
that it was "renegotiating its nonrecourse debt on a limited number of hotels" and "discontinued
debt service on its Hilton hotel in Ontario Calif' [Innkeepers USA Trust Provides Business
Update, dated January 21, 2010]; (b) in March 2010, Wachovia Bank, N.A, the master servicer
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Ms. Tracy Hope Davis
United States Trustee- Region 2
Mr. Paul K. Schwartzberg
August 11,2010
Page 2 of3
of one of the Debtors' mortgage loan pools, informed the Debtors that a "triggering event" under
the June 29, 2007 Cash Management Agreement had occurred [First-Day Declaration at '1[ 49];
and (c) Moelis has been working with the Debtors since March 24,2010 [First-Day Declaration
at '1[ 60). Presumably this valuation exercise took into account the likely improving operating
performance of the Debtors' hotels. Indeed, operating metrics (occupancy, average daily rate,
RevPar) throughout the mid-price hotel industry have continued to improve since March 31.
1
1n a Difficult Lending Environment, Innkeepers Recently Refinanced a Major Property
Showing There Must Be Value in Excess of the Refinancing. There is strong evidence
suggesting that certain of the Debtors and non-debtor affiliates have equity value. For example,
non-debtorKP A Raleigh .TV, shown on the corporate organization chart on page 16 of the First-
Day Declaration as an affiliate of Apollo, holds a 49% interest in the joint venture Genwood
Raleigh Lessee LLC ("Genwood"). This is not subject to Lehman's mortgage. In April2008,
Genwood filed a real estate property tax appeal with the County of Wake, State of North
Carolina in which it stated that it thought that the fair market value of its property was $16
million. See Board of Equalization and Review Notice of Appeal. In November 2009, Genwood
refinanced the property with a $32 million loan. See Real Property Transaction Record.
Presumably, the property was worth in excess of $32 million, particularly given the lending
market in November 2009, and is worth even more now.
In .-:Jk:eepers' Request to Pledge Properties to Support New Debt Shows There is Eguitv
Value in the Properties. Apollo's wholly owned Grand entities that own preferred shares in
Innkeepers, are required to complete certain property improvement programs ("PIPs") under
Franchise Agreements entered into with Marriott Intemational Inc. ott") for 44 of the
Debtors' 72 hotels. The Debtors are currently seeking to fund these PIPs using debtor-in-
possession ("DIP") fmancing. See Debtors' Motion for the Entry of an Order Authorizing the
Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming
Basis, dated July 19,2010, at 3 [Docket No. 23].
Notably, the Debtors' Five Mile DIP Facility attempts to pledge hotel properties yielding
equity to preferred shareholders (namely, the Residence Inn San Diego and the Residence Inn
Tysons Comer) to support borrO\vings to improve hotels for which Apollo is contractually
responsible and is being sued by Midland. These hotels are not encumbered by Lehman's
mortgage and create equity value for the preferred shareholders as long as they are not pledged to
support debt used to help Apollo at the preferred shareholders' expense. Apollo separately
guaranteed the obligations to perform the PIPs and repay the debt of Grand Prix Belmont LLC
1
See e.g., "InterContinental Hotels Savs Room Rates Are Rising" reported in the Wall Street Journal, August 11,
2010 ..
Ms. Tracy Hope Davis
United States Trustee- Region 2
Mr. Paul K. Schwartzberg
August 11,2010
Page 3 of3
(and other Grand Prix entities owned by Apollo), and is seeking to discharge its obligations to
fund improvements on a majority of Innkeepers' hotels using DIP financing encumbering
properties yielding equity value.
Five of Seven Properties Outside Lehman's Mort2:age Provide Equitv for Preferred
Shareholders. Lehman will receive 100% of the ownership interest in the reorganized Debtors
even though its debt is secured by onlv 65 of the 72 hotel properties held by the Debtors, and
Lehman is not secured by any of the Seven Non-Lehman Mortgages. Thereafter, Apollo, but not
the other preferred shareholders, will acquire half the ownership interest from Lehman once the
reorganization is complete. Wbile the holders of the Seven Non-Lehman Mortgages will receive
replacement liens, there is no evidence that the Seven Non-Lehman Mortgages are under water.
At least five hotels owned by Innkeepers (Homewood Suites San Antonio, Residence Inn Tysons
Comer, Doubletree Guest Suites, Washington DC, Residence Inn San Diego and the Residence
Inn Garden Grove) are separately capitalized with debt at (low) fixed interest rates and maturities
in 2016 (none of which was by provided by Lehman). Upon information and belief, all of these
hotels generate net operating income leaving funds available to pay principal and interest on the
debt. Notably, publicly available fmancial data on Bloomberg shows that five of the seven loans
have been earning more cash flow than interest and expenses over the last several months.
2
Yet
the equity value of these properties is being extinguished for the benefit of Lehman and Apollo.
3
Thank you for considering this request a11d taking into account that time is of the essence.
Please feel free to contact me with any questions at your convenience.
MJB/ds
CC: Paul Basta, Esq.
Lorenzo MarinUZ?i, Esq.
pbasta@kirkland.com
lmarinuzzi@mofo.com
i e n e n s t o ~
The Debt Service Coverage Ratios (DSCR.s) for five of the individual loans exceed a rating of 1 for most
periods. Financial analysts will typically interpret any rating above 1 as undisputed evidence of solvency.
In addition to an analysis ofDSCR.s, the Ad Hoc Committee also believes that a valuation of the net operating
income (NOI) and capitalization rate (cap rate) of the five hotels yields at least $27mm of value that flows to the
preferred shareholders.
EXHIBIT 3
Schwartzberg, Paul (USTP)
From: Bienenstock, Martin J. [MBienenstock@deweyleboeuf.com]
Sent: Thursday, August 19, 2010 6 25 PM
To: Schwartzberg, Paul (USTP); Wishnew, Jordan A
Cc: Marinuzzi, Lorenzo; Anup Sathy; Paul Basta; Jennifer L Marines, Miller, Brett H.
Subject: RE Innkeepers USA Trust, et al, 10-13800 (SCC): Response to Supplemental Request for Equity
Committee
Paul, from the perspective of this firm's clients, this week's letters from the Debtors and the statutory creditors'
committee actually corroborate that equity value is available to the Debtors' preferred shareholders, but the same
may not be apparent to the United States Trustee who is not as immersed in the case or familiar with the facts.
Therefore, I write to point out JUSt three of the many clear obfuscations in the letters designed to cover over equity
value.
First, page 5 of the Debtors' letter takes issue with our method of confirming the values of 7 hotel properties not
subject to the Lehman blanket mortgage. What is striking, however, is that (a) the Debtors admit on page 5
that there are 7 properties outside the blanket mortgage, and (b) the Debtors do not list any debt, let alone any
significant debt, standing between the values of those properties and the preferred shareholders. If the properties
were losers. they would be abandoned! We brought your attention to what is public, namely positive cash flow.
Despite all the obfuscation, neither the Debtors nor the committee have shown any reason why those hotels' values
do not go to the preferred shareholders.
Second, both the Debtors and the committee ask you to ignore Apollo's admission rn its Form 10Q filed on May 26,
2010 that its preferred shares were worth over $5 million, on the ground Apollo filed its Form 10K this month listing
its preferred shares' value at zero. Indeed, the Debtors claim we "cherry picked" the facts. Conveniently, neither
the Debtors nor the committee connect the dots. In July, the Debtors commenced their chapter 11 cases and filed
their plan support agreement and first day affidavit announcing that their chapter 11 plan would extinguish all
preferred shares and hand the enterprise to Lehman subject to Apollo's arrangement to buy back half of it. Thus, in
August, Apollo had to list its shares at zero because it had already determined to try to wipe out all equity. But, on
May 26, when restructuring preparations had been ongoing for months and all the cash flows and other negative
facts were known, Apollo listed its preferred shares as being worth $5.268 million. This is just the tip of the iceberg,
and we hope the United States Trustee will recognize that estate resources are being used to support Apollo's deal
and not to promote the policies underlying the Bankruptcy Code.
Third, both the Debtors and the Committee argue that since we were able to file an examiner motion, the preferred
shareholders are adequately represented. Does that mean that whenever parties in interest take any step to protect
themselves, they are no longer eligible for the protection of a statutory committee? Here, where Apollo and
management have made clear they are committed to extinguishing preferred shareholders, it is crystal clear that the
preferred shareholders not only lack adequate representation, they are suffering the Debtors' negative
representation dictated by Apollo as the controlling party The debtors have an unlimited budget to extinguish
shareholders, while a hand full of investors are expected to come out of pocket to protect the whole class based on
a speculative right to reimbursement in the hereafter? We respectfully request that the United States Trustee reject
such thinking and appoint a preferred shareholders' committee.
Martin J. Bienenstock
Chairman - Business Solutions & Governance Department
Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, NY 10019
Direct: +1 212 259 8530
General: +1 212 259 8000
Fax: +1 212 259 6430
Mobile +1 917 952 8987
mbienenstock@ctLcom
wwwdLcom
8/20/201 0
EXHIBIT4
Anup Sathy, P.C.
To Call Writer Directly:
(312) 862-2046
anup.sathy@kirkland.com
KIRKLAND &. ELLIS LLP
AND AFFILIATED PARTNERSHIPS
300 North LaSalle Street
Chicago, Illinois 6065--1
(312) 862-2000
www.kirkland.com
August 1 0, 2010
Facsimile:
(312) 862-2200
VIA HAND DELIVERY AND EMAIL CONFIDENTIAL
Paul K. Schwartzberg
Office of the United States Trustee
Southern District of New York
33 Whitehall Street
New York, New York 10004
Re: In re Innkeepers USA Trust. et aL, No. 10-13800 (SCC)
Request for Official Equity Committee
Dear Mr. Schwruizberg,
As you know, Kirkland & Ellis LLP is proposed counsel to Innkeepers USA Trust and its
affiliated debtors and debtors in possession in the above-captioned chapter 11 cases (collectively,
the "Debtors"). I run writing at your request and in response to the letter dated July 28, 2010,
received by your office from counsel to Esopus. Creek Advisors and FMR, LLC (collectively,
the "Equity Holder Group"). The Equity Holder Group purports to represent holders of
approximately 15.3% of Innkeepers USA Trust's 8.0% Series C Cumulative Preferred Shares
and has requested the appointment of an official equity committee in these cases pursuant to
section 11 02(a)(l )-(2) of the Bankruptcy Code.
In light of the stringent standard for appointing an equity committee in a chapter 11 case,
the Debtors strongly recommend that the Office of the United States Trustee (the "U.S.
Trustee") deny the Equity Holder Group's request. As set forth more fully below. the Equity
Holder Group has not, and cannot, meet its high burden of proving that an equity committee is
necessary under the present facts and circumstances of these chapter 11 cases.
Pursuant to section 11 02(a)( 1) of the Bankruptcy Code, the determination of whether to
appoint an additional committee is a determination to be made by the U.S. Trustee. 11 U.S.C.
11 02(a)(l ). Under this section, the U.S. Trustee may appoint an additional committee if the
U.S. Trustee "deems it appropriate." Id.; see also In re Enron Corp., 279 B.R. 671, 685 (Banla.
S.D.N.Y. 2002); In re Williams Commc'ns Group. Inc., 281 B.R. 216, 223 (Bmtkr. S.D.N.Y.
2002) (hereinafter "Williams").
Hong Kong London Los Angeles IVIunich New York Palo Alto San Francisco Shanghai Washington, D.C.
Paul K. Schwartzberg
Page 2
KIRKLAND &.. ELLIS LLP
The U.S. Trustee's authority tmder section 11 02(a)(l) is discretionary, and U.S. Trustees
in this jurisdiction are guided by the standard applied by courts in this District under section
1 102(a)(2). See. e.g., In re Oneida Ltd., No. 06-10489, 2006 WL 1288576, at *1 (Bankr.
S.D.N.Y. May 4, 2006) (ALG) (stating that "the U.S. Trustee found that courts in this District
have held that the appointment of an equity committee should be the rare exception, and should
not be appointed unless equity holders" satisfy the two part test established t L . ~ d e r V/illimns with
respect to section 1102(a)(2) of the Bankruptcy Code).
Under Williams, a court may order the appointment of an official equity committee if
equity holders can prove that (1) there is a substantial likelihood they will receive a meaningful
distribution in the chapter 1 1 case under a strict application of the absolute priority rule and
(2) equity holders are unable to represent their interests in the bankruptcy case without an official
committee. See Williams, 281 B.R. at 223; Oneida, 2006 WL 1288567, at *1. This
determination is fact-specific and courts consider a number of other factors, including whether
the costs of an additional committee-the direct financial costs, as well as the indirect costs due
to delays and disruptions--will significantly outweigh the concern for adequate representation.
!d. at 220. Ultimately, the moving party bears the burden of demonstrating that an additional
committee is necessary for adequate representation. In re Dana Corp., 344 B.R. 35, 38 (Bankr.
S.D.N.Y. 2006) (emphasis added); In re Enron Com., 279 B.R. 671, 685 (Bankr. S.D.N.Y.
2002). Given this heightened standard, it is well-settled in this and other Districts that the
appointment of an equity committee is an extraordinary remedy and should be the rare exception.
In reCharter Commc'ns, Inc.; No. 09-11435 (JMP), Hr'g Tr. 48:7-9 (Bankr. S.D.N.Y. June 17,
2009) (denying motion to appoint an official equity committee while noting that he appointment
of an equity holder's committee "under applicable precedent is the exception and not the rule");
see also In re Spansion, Inc., 421 B.R. 151, 156 (Bankr. D. Del. 2009) (same).
As explained in detail below, the U.S. Trustee should deny any request to appoint an
official equity committee for at least three reasons:
s First, equity holders do not have any economic stal(e in the Debtors' estates;
Second, the appointment of an official equity committee will result in substantial
tangible and unnecessary intangible costs to the Debtors' estates; and
Third, the interests of equity holders are already adequately represented in tbese
chapter 11 cases.
1. Equity Holders Do Not Have Any Economic Stake in the Debtors' Estates.
The Equity Holder Group has not met, and carmot meet, its heavy burden of
demonstrating a substantial likelihood of a meaningful recovery in these chapter 11 cases.
Paul K. Schwmtzberg
Page 3
KIRKLAND &. ELLIS LLP
Notably, the prospect of equity holders receiving a meaningful distribution under any potential
plan of reorganization depends on the depth of a debtor's solvency. "When a debtor appears to
be hopelessly insolvent, an equity committee is not generally warranted because neither the
debtor nor the creditors should have to bear the expense of negotiating over the terms of what is
in essence a gift." Williams, 281 B.R. at 223 (emphasis added); see also Snansion, Inc., 421 B.R.
at 156 ("[I]f equity holders have no reasonable prospect of receiving a meaningful distribution,
an equity committee could serve no legitimate role in negotiating a plan."); Exide Techs. v.
Wise. lnv. Board, No. 02-1572, 2002 WL 32332000, at * 1 (Banla. D. Del. Dec. 23, 2002) ("'fa
debtor appears to be 'hopelessly insolvent,' the appointment of an official equity committee is
generally regarded as unjustified.").
Notwithstanding this stringent standard, the Equity Holder Group seeks official
committee status based upon the unsubstantiated allegation that the Debtors are "likely solvent."
Specifically, the Equity Holder Group cites to various sections of the Amended Declaration of
Dennis Craven, Chief Financial Officer of Innkeepers USA Trust, In Support of First Day
Pleadings [Docket No. 33] (the "Craven Declaration") to suggest that the value of the Debtors'
consolidated assets, liabilities, and EBITDA support its "straw man" solvency theory. However,
the information referenced by the Equity Holder Group is taken out of context m1d represents an
oversimplified view as to the Debtors' financial condition. First, the values cited by the Equity
Holder Group regmding the Debtors' consolidated assets and liabilities represent the "book
value" and not the "market value" of the Debtors' properties, which undoubtedly are
significantly different. As noted in the Craven Declaration, "[t]he Debtors' inability to invest in
their hotelproperties, along with the collapse of the real estate market, have caused the value of
the Debtors' hotels to severely decline, resulting in the overall erosion of the Debtors'
enterprise value." See Craven Declaration a t ~ 57 (emphasis added).
Second, any notion that the Debtors' EBITDA for 2009 can be used to gauge the
solvency of the Debtors while in bankruptcy is far-fetched and inconclusive at best. The Equity
Holder Group fails to mention the other "high-end" companies with comparable EB!TDA
multiples and the fact that application of standard valuation methodologies does not support the
theory that the Debtors' estates are solvent. Although the Debtors have not yet prepared a formal
valuation of their business at this early stage, no formal valuation is required to demonstrate that
there appears to be no hope for recovery by equity holders. The Debtors' estates are saddled
with more than $I .5 billion in debt-approximately $1.42 billion of which is secured .and has
priority over any potential recovery by equity holders. As it stands, the Debtors' prearranged
cases currently hinge on consummation of a chapter I 1 plan pursuant to which approximately
$7I5 million in debt would be eliminated. Specifically, under the plan, Lehman ALI, Inc.
(''Lehman"), the Debtors' second largest secured creditor, would convert 100% of its debt to
equity, and the remaining secured lenders' debt will be discow1ted by amounts ranging up to
over 30%. Beyond that, there is over $I 40 million in mezzanine debt that would have to be
satisfied in full before equity holders could receive any distribution whatsoever from the assets in
Paul K. Schwartzberg
Page4
KIRKLAND &.. ELLIS LLP
those respective pools. Further, there is approximately $68 million in proposed debtor in
possession financing that would have to be repaid before equity holders could receive a recovery.
Thus, it is clear that creditors holding positions senior to equity holders will have their claims
significantly compromised.
Accordingly, pursuant to the plan term sheet annexed to the Craven Declaration, and
under any credible argument or valuation presented in these cases, the Debtors' equity holders,
including the Debtors' controlling owner, Apollo Investment Corporation ("AIC"), will not be
entitled to any distribution on account of such interests. Despite the Equity Holder Group's
characterization of the plan term sheet as a vehicle for AIC to retain control of its equity position,
whether Lehman determines to sell 50% of its equity distribution to AIC or to some other third
party (as specifically contemplated in the plan tenn sheet) is a red hening. The Equity Holder
Group's w1substantiated condemnation and mischaracterization of the plan te!TI1 sheet is merely
an effort to obfuscate the fact that Equity Holder Group's request fails to meet necessary legal
standards.
Because the Equity Holder Group has offered no credible evidence of the Debtors'
solvency or otherwise established any real possibility that equity holders will receive a
meaningful distribution from the Debtors' estates, its request for an official equity committee
should be denied.
2. The Appointment of an Official Equitv Committee Will Result in Substantial and
Unwarranted Tangible and lnta11gible Costs.
The appointment of an official equity committee will also result in substantial tangible
and intangible costs to the Debtors' estates that are not wammted under the facts and
circumstances of these cases. First, an official equity committee w1doubtedly will seek to hire its
own legal and financial advisors, which will result in additional professional fees asserted against
the Debtors' estates. See Williams, 281 B.R. at 220 (citing Saxon Indus., Inc., 39 B.R. 945, 947
(Bankr. S.D.N.Y. 1984) (noting that the appointment of equity committee raises cost concerns
because it is closely followed by the applications to retain attorneys and accormtants)).
Moreover, an official equity committee-even with the best intentions-will necessarily cost the
Debtors' estates intangibly over the life of these chapter 11 cases in the form of additional, and
potentially duplicative, demands on both the Debtors' employees and their professionals for
information and other time-consuming activities, causing unnecessary delays and disruptions to
the overall bankruptcy process. !d. (citing Albero v . .Tolms-Manville Corp. (In re Johns-Manville
~ ) , 68 B.R. 155, !63 (S.D.N. Y. 1986)).
The prospect for increased professional fees and unnecessary diligence delays is
antithetical to preserving or enhancing estate value for parties with a real economic stake in these
cases. As noted earlier, the Debtors have already negotiated the preliminary terms of a chapter
Paul K. Schwmizberg
Page 5
KIRKLAND &_ELLIS LLP
11 plan that will eliminate more than $715 million in debt. To that end, the Debtors have entered
into a plan support agreement with Lehman. Under the terms of the plan support agreement,
Lehman's commitment to support a plan is conditioned, in pmt, on obtaining confirmation of a
plan no later than 240 days after the petition date and going effective no later than 270 days after
the petition date. The Debtors firmly believe that an expeditious reorganization will minimize
um1ecessary administrative expenses, m1d ultimately assures the swift execution of a plan that
stands to significantly deleverage the Debtors' balance sheet. On the other hand, the attendant
costs from the appointment of an official equity committee in these chapter I I cases will only
create an unnecessmy a11d costly hurdle to achieving a11 expeditious exit from chapter II with no
corresponding benefit for equity holders. Thus, under the present facts and circumsta11ces, the
appointment of an official equity committee weighs against any potential concerns raised by the
Equity Holder Group in their request for a11 off1cial committee.
3. The Interests of the Innkeepers USA Trust's Equity Holders Are Already
Adequatelv Represented.
As previously mentioned, under section 11 02(a)(2) of the Bankruptcy Code, the
appointment of an official equity committee is only appropriate if necessary to ensure that a
debtor's equity holders are adequately represented. Wiiiiams, 281 B.R. at 223 ("It is instructive
to note that the statutory focus of section 1102(a)(2) is not whether the shmeholders are
'exclusively' represented, but whether they are 'adequately' represented."). In these cases, the
interests of equity holders are already adequately represented by various entities, including, the
official committee of unsecured creditors recently appointed in these cases (the "Committee")
and the directors and officers of Innkeepers USA Trust. Further, no shareholder has been
precluded from pmicipating in m1y of the Debtors' proceedings. Id.
As an initial matter, the interests of Innkeepers USA Trust's equity holders
(e.g, asserting a higher valuation and investigating potential causes of action) me and will be
effectively represented by the Committee. Indeed, many courts have held that the alignment of
interests between equity holders and unsecured creditors is sufficient to overcome the need for an
official equity committee. See. e.g., In re Charter Commn'cns, Inc., No. 09-Il435, Hr'g. Tr.
50:20-24 (Bankr. S.D.N.Y. June 17, 2009) (JMP) (denying motion to appoint equity committee
and noting that the creditors' committee had already undertaken a11 active review of the same
issues that an equity committee would likely address); Williams, 281 B.R. at 223 (denying
motion to appoint official equity committee and noting that that the creditors' committee "has
sufficiently al.igned or parallel interests with the [ s ]hareholders to preclude the need for an
additional committee").
In addition, there cm1 be no doubt that the interests of the equity holders and those of
Midland Loan Services, Inc. ("Midland") and the other lenders alleging, among other things.
that the Debtors are understating the value of their assets and businesses, me aligned. Midland
Paul K. Schwartzberg
Page 6
KIRKLAND &.. ElLIS LLP
has proven highly motivated in demonstrating the highest value with regard to the amount of the
Debtors' assets that are pledged as collateral for the loan for which Midland is the special
servicer. While the Debtors strongly dispute these assertions, efforts by Midland to demonstrate
to the Court's satisfaction that the value of the Debtors' assets exceed the amount of the Debtors'
secured debt to receive a recovery on what the Debtors believe are significant deficiency claims
(a showing that must be made for equity to even been in the ballpark on value) will undoubtedly
inure to the benefit of the equity holders. These issues are already squarely before the Court in
the context of the numerous pleadings filed by Midland (which have been joined by other
secured lenders) and discovery currently sought in connection therewith.
Moreover, the board of trustees of Innkeepers USA Trust (the "Board"), which includes
three independent directors, owes fiduciary duties to maximize the value of its estate for the
benefit of its constituencies. The Board has upheld these duties throughout these cases thus far,
and the Equity Holder Group has not presented any evidence to suggest otherwise.
Accordingly, the Equity Holder Group has failed to meet its burden in proving that the interests
of equity holders are not adequately represented by the Board and by management See In re
Edison Bros. Stores. Inc., No. 95-1354, 1996 WL 534853, at *4 (D. DeL Sept. 17, 1996)
(affirming bankmptcy court's order denying motion to appoint an official equity committee and
noting that shareholders failed to establish that the debtors' management was incapable of
performing their fiduciary duties to shareholders due to a conflict of interests with creditors).
Lastly, the Equity Holder Group appears to be well-funded and adequately represented by
bankruptcy counseL Indeed, upon information and belief, FMR LLC is the parent company of
various entities associated with the trade name "Fidelity Investments"-one of the world's
largest mutual fund firms. If the Equity Holder Group's main concern lies with respect to the
Debtors' valuation, it appears fully capable of funding this matter through confirmation.
Spansion. 421 RR at 156 (denying motion to appoint an equity committee while noting that the
ad hoc equity group was "well organized, well represented by counsel, and adequate to the task
of representing its interests without 'official' status."). Nonetheless, to the extent the Equity
Holder Group mal(es a substantial contribution in these cases, it will be entitled to seek
reimbursement for its expenses in accordance with section 503(b)(3)(D) of the B<mkmptcy Code.
Id. 421 B.R at 163-164 (holding that the ad hoc equity committee could later seek
reimbursement to the extent of its substantial contribution under section 503(b )(3)(D)).
For these reasons, the Debtors respectfully submit that the appointment of an official
equity committee-particularly, for a constituency that is out of the money-is inconsistent with
applicable law and goes against the best interests of constituents with an economic stake in these
cases. Accordingly, the Debtors urge the U.S. Trustee to deny the Equity Holder's Group
request for an ot1icial equity committee.
Paul K. Schwartzberg
Page 7
KIRKLAND &.. ELLIS LLP
S ycerely,
1
~ ~ -
Anup Sathy, P.C.
EXHIBIT 5
KIRKLAND &. ELLIS LLP
Anup Sathy, P.C.
To Ca!l Writer Directiy:
(312) 862-2046
anup.sathy@kirkland.com
AND AFFILIATED PARTNERSHIPS
300 North LaSalle Street
Chicago, Illinois 60654
(312) 862-2000
www.klrkland.com
August 17, 2010
VIA HAND DELIVERY AND EMAIL
Paul K. Schwartzberg
Office of the United States Trustee
Southern District of New York
33 Whitehall Street
New York, New York 10004
Facsimile:
(312) 862-2200
CONFIDENTIAL
Re: In re Innkeepers USA Trust. et aL, No. 10-!3800 (SCC)
Response to Supplemental Request For Official Equity Committee
Dear Mr. Schwartzberg,
As you !mow, Kirkland & Ellis LLP is counsel to Innkeepers USA Trust and its affiliated
debtors and debtors in possession in the above-captioned chapter 11 cases (collectively,
the "Debtors"). The Debtors are in receipt of the letter sent by counsel alleging to represent
Esopus Creek Advisors and FMR, LLC (collectively, the "Equity Holder Group")
1
supplementing the initial request for an official equity committee in these chapter 11 cases
pursuant to section ll02(a) of the Bankruptcy Code (the "Supplemental Letter")
2
The Debtors have carefully reviewed and evaluated the Equity Holder Group's
supplemental information in light of the applicable legal standard for appointing an official
equity committee and, based upon that review, again strongly reaffirm their recommendation that
the Office of the United States Trustee (the "U.S. Trustee'')' deny the Equity Holder Group's
request. As noted in the Debtors' Initial Response, the Equity Holder Group bears the burden of
demonstrating that an equity committee is justified under section 11 02(a) of the Bankruptcy
Code by proving that (1) there is a substantial likelihood that equity holders will receive a
meaningful distribution in these chapter 11 cases under a strict application of the absolute
Hong Kong
On August 16, 2010, Dewey & LeBoeuf LLP filed a Verified Statement of Ad Hoc Committee of Preferred
Shareholders Pursuant to Bankruptcy Rule 2019(a) [Docket No. 205], in which it purports to represent
Brencourt Credit Opportunities Master, Ltd., Esopus Creek Value LP, and Plainfield Special Situations Master
Fund II Limited, which allegedly hold, on a collective basis, approximately 24% of Innkeepers USA Trust's
8.0% Series C Cumulative Preferred Shares. It is unclear whether Dewey & LeBoeuf LLP represents FMR,
LLC, as was originally represented in the Equity Holder Group's initial request.
On August 10,2010, the Debtors submitted an initial response (the "Debtors' Initial Response") to the Equity
Holder Group's initial request for the appointment of an official equity committee, dated July 28, 2010.
London Los Angeles Munich New York Palo Alto San Francisco Shanghal
Paul K. Schwartzberg
Page 2
KIRKLAND &. ELLIS LLP
priority rule and (2) equity holders are unable to represent their interests in these chapter 1 1 cases
without an official committee. See. e.g., In re Oneida Ltd., No. 06-10489, 2006 WL 1288576, at
*1 (Bankr. S.D.N.Y. May 4, 2006); In re Williams Commc'ns Group. Inc., 281 B.R. 216, 223
(Bankr. S.D.N.Y. 2002). In light of the high standard for appointing an equity committee, courts
have held that the relief requested by the Equity Holder Group is extraordinary in nature and
should be rarely granted. See, e.g., In re Charter Commc'ns, Inc., No. 09-11435 (JMP) (Bankr.
S.D.N.Y. June 17, 2009); In re Spansion. Inc., 421 B.R. 151, 156 (Bankr. D. Del. 2009).
Against this backdrop, the Equity Holder Group has offered no additional credible
evidence to suggest-let alone prove-that there is a substantial likelihood that the Debtors'
equity holders will receive a meaningful distribution from the Debtors' estates. The Equity
Holder Group ignores the stringent legal standard for appointing an equity committee by relying
on arguments that are riddled with misleading presumptions, mischaracterizations, and
inconclusive determinations, all of which are strategically engineered to side-step the glaring fact
that the Equity Holder Group has failed to provide the U.S. Trustee any legitimate reason that
would merit granting such extraordinary relief at this early juncture in these chapter 11 cases. As
such, and for the reasons set forth herein, the U.S. Trustee should deny any request to appoint an
official equity committee.
1. The Value of Apollo's Preferred Shares Listed in Dated
SEC Filings Does Not Prove That the Debtors' Estates Are Solvent.
The Equity Holder Group's reliance on the value of Apollo Investment Corporation's
("Apollo") preferred shares listed on its Form I 0-K for the year ended March 31, 2010 (the
"Annual Report"), is disingenuous and hardly determinative of the current value of the Debtors'
equity. The referenced value assigned to Apollo's preferred shares is an estimate that was
determined by Apo!Io for the value of its shares as of March 31,2010 (almost six months ago)
and is based on a host of undisclosed assumptions and outdated projections. While it is true that
the Debtors engaged in limited early-stage restructuring negotiations prior to March 2010, the
fact that Apollo may have attributed some measure of value to its preferred shares in light of a
potential restructuring lacks any direct relevance to the current equity value of the preferred
shares today, particularly, considering the recent commencement of these chapter 11 cases.
Tellingly, on August 4, 2010, Apollo filed its Form 10-Q for the quarter ended as of June 30,
2010 (the "Quarterly Report"), a copy of which is attached hereto as Exhibit A. The Quarterly
Report discloses that Apollo's interests in the Debtors have no value.
3
The Equity Holder
Group's misplaced reliance on Apollo's estimate based on its dated Annual Report rather than
the more recent Qua..rterly Report is just one example of how it presents cherry-picked facts out
of context.
See Apollo Investment Corp., Quarterly Report (Form 10-Q) for quarter ended June 30, 2010, at 13.
KIRKLAND &. ELLIS LLP
PaulK. Schwartzberg
Page 3
2. The Genwood Financing Transaction Demonstrates That
There Is No Value Available to Equitv Holders in This Property.
The Equity Holder Group mischaracterizes and misconstrues the impact of the financing
transaction involving the Debtors' joint venture Genwood Raleigh Lessee LLC ("Genwood").
Specifically, the Equity Holder Group "presumes" that there is equity value in the Genwood
property because in November 2009, according to the Equity Holder Group, Genwood
"refinanced" the hotel property with a $32 million mortgage loan.
4
Citing the depressed state of
the lending market in 2009, the Equity Holder Group incorrectly claims (without any supporting
evidence) that the Genwood property must be currently valued in excess of the $32 million
mortgage loan, "presumably" leaving value available to equity holders.
5
This argument is
flawed for several reasons. First, the Genwood transaction was not a refinancing of the existing
mortgage loan, which was scheduled to mature in November 2009. The existing lender, CSE
Mortgage LLC ("CSE"), agreed to extend the maturity date of the mortgage loan in exchange
for, among other things, an interest rate increase. This transaction is a classic example of a loan
amendment without a lender extending new money rather than a true "refinancing," as the Equity
Holder Group incorrectly claims. Indeed, the document memorializing the transaction is entitled
"Third Amendment to Loan Agreement," a copy of which is attached hereto as Exhibit B.
Moreover, the need to extend the maturity date on the mortgage loan, coupled with the
unwillingness of new I enders to extend credit at the time and CSE' s decision not to foreclose on
its collateral, if anything, are facts supporting the conclusion that (a) the hotel property was, and
still is, worth less than the amount of the existing mortgage loan and (b) there is no value in the
Genwood property that could support a distribution to equity holders.
3. Pledging Undersecured Pronerties with Priming Liens to Sunport
New Debt Does Not Reflect Eguitv Value in the Debtors' Properties.
The Equity Holder Group also attacks the Debtors' request to pledge certain properties as
collateral to secure their obligations under the Five Mile DIP Facility, stating that these
properties are not encumbered by Lehman's mortgage and waul d, thus, "create equity value for
the preferred shareholders as long as they are not pledged to support debt."
6
This argument is
false for several reasons. First. the security interest in such properties is limited to the amount of
the debt advanced under the Five Mile DIP Facility with respect to such properties. Second,
these properties already collateralize other prepetition obligations, namely, the $4 7.4 million
Capmark Mission Valley Loan Agreement and the $25.6 million Merrill Tyson's Comer Loan
Agreement. See Amended Declaration of Dennis Craven, Chief Financial Officer of Innkeepers
4
6
See Supplemental Letter at 2.
!d.
Id. These properties include the Residence Inn, located in Mission Valley, San Diego, California and the
Residence Inn located in Tyson!s Comer, Vienna, Virginia.
Paul K. Schwartzberg
Page4
KIRKLAND &. ELLIS LLP
USA Trust, In Support of First Day Pleadings at 'lf'lfll, 32, 36 [Docket No. 33] (the "Craven
Declaration"). As a result, the respective lenders under such mortgage facilities would have
priority over equity holders with respect to any distribution under a chapter 11 plan on account of
the collateral. Moreover, even if the Equity Holder Group could somehow demonstrate that
there is value in these properties sufficient to (a) fully pay down the mortgage debt, including
interest and fees, (b) pay all other creditors with claims at these property levels in full with
interest, and (c) pay the claims of any creditors of any of the Debtor entities between the property
level debtor and Innkeepers USA Trust in full with interest, such theoretical distribution would
still fall below the "meaningful distribution" that is required by the authority in this district. As
such, the Equity Holder Group has not satisfied its burden under section 11 02(a) of the
Bankruptcy Code.
Third, the Debtors' decision to pledge these properties as collateral to obtain DIP
financing is consistent with their fiduciary duty to maximize value for all creditors and with
section 364(d) of the Bankruptcy Code, which allows a debtor to obtain postpetition financing on
a priming lien basis if, among other things, the proposed financing is necessary to preserve estate
assets and essential for the continued operation of the Debtors' business. As the record in these
cases demonstrates (and as will be further shm:vn at the September 1, 2010 hearing), the Debtors'
entry into the Five Mile DIP Facility is a reasonable and necessary exercise of their business
judgment given that the proceeds of the DIP facility will provide the Debtors with sufficient
liquidity to complete a substantial number of property improvement programs ("PIPs") in
co.nuection with certain key franchise agreements.
7
In fact, proceeds of the Five Mile DIP
Facility will be used, in part, to fund the Debtors' PIP obligations with respect to the ce1tain
Marriot affiliated hotels, including the Residence Inn Mission Valley- San Diego and the
Residence Inn Tyson's Comer - Virginia, which is why these properties are pledged under the
Five Mile DIP Facility; they are the primary beneficiaries of the Tranche B and Tranche C
Facilities, respectively. See Debtors' Motion for the Entry of an Order Authorizing the Debtors
to' Obtain Postpetition Financing From Five Mile Capital Partners On a Priming Basis Pursuant
to Sections 364(c)(J), 364(c)(2), 364(c)(3), and 364(e) of the Bankruptcy Code at 'll5, 12-20 (the
"Five Mile DIP Motion") [Docket No. 24]. As the record in these cases clearly reflects, failure
to satisfY the Debtors' PIP obligations could result in the termination of valuable franchise
agreements. See Five Mile DIP Motion at ' l l ~ 15, 31. Any loss of the Debtors' key franchise
agreements would have a devastating effect on the Debtors' operations, the underlying value of
the affected hotel, and, ultimately, the Debtors' enterprise value. ld. By pledging these
properties and others to obtain DIP financing for their direct benefit, the Debtors will both
increase the value of such properties through necessary capital improvements and preserve their
overall enterprise value. !d.
Contrary to the Equity Holder Group's claim, it is the borrower under each of the mortgage facilitks (not
Apollo nor its wholly owned subsidiary which owns the Debtors' preferred shares) who is contractually
required to complete all of the Debtors' PIP obligations ..
Paul K. Schwartzberg
Page 5
KIRKLAND &. ELLIS LLP
4. The Equity Holder Group Has Not Met Its Burden
In Proving That Certain Hotel Properties Are Solvent.
The Equity Holder Group further claims that there is equity value in the Debtors' estates
because, based "upon information and belief," five of the Debtors' seven hotel properties outside
the Lehman mortgage pool generate enough income to service their debt obligations. To bolster
this speculative claim, the Equity Holder Group makes a series of misleading and unfounded
assertions based on an oversimplified analysis of the financial performance of these hotel
properties. The Equity Holder Group arrived at these questionable determinations after gleaning
certain information from a Bloomberg webpage and then burying it in a footnote. Notably, the
Equity Holder Group alleges that the debt service coverage ratio ("DSCR") for five of the
Debtors' properties have a rating above 1.0 for "most periods" without specifically mentioning
which periods it is referring to.
8
The Equity Holder Group further asserts, without any support,
that financial analysts "typically" interpret any rating above 1.0 as undisputed evidence of
solvency.
9
The references to the DSCR and other alleged indications of solvency fall short for
several reasons, including the fact that the cited measures are generic and conclusory, focus on a
company's ability to meet its near term obligations with little regard to the comprehensive
understanding of futnre obligations facing the company (including long term debt obligations),
a11d are based on book values rather tha..n fair market value as indications of a company's ability
to fund future operating and debt costs as they mature. Accordingly, the Equity Holder Group's
unsubstantiated claims fall well short of proving that there is a substantial likelihood that equity
holders will receive a meaningful distribution in these chapter I! cases.
The fact remains that while certain of the Debtors' hotels generate net operating income
that, at times, may exceed the principal amortization and interest payments on their debt, these
hotels also have other financial obligations they must satisfy to remain competitive-namely,
capital expenditnres in the form of substantial P!P obligations. As mentioned in the Craven
Declaration, these obligations "are costly, subject to delays, and disrupt operations and displace
revenue at the hotels while rooms under renovations are out of service." See Craven Declaration
at 'If 52. Moreover, as a result of the Debtors' significant liquidity constraints and deteriorating
financial condition, many of these obligations remain unperformed to date, which is why the
Debtors have endeavored to obtain postpetition financing and negotiated with franchisors to
forbear on exercising their remedies as a result of potential defaults. ld. at 'j]54 ("As of the
Petition Date, the Debtors received numerous notices of potential default from Franchisors,
including 22 notices of default from Marriot."). The Debtors inability to invest in their hotels,
coupled with the erosion of the real estate market, has caused the value of each of the Debtors'
hotels to severely decline, resulting in the overall erosion of the Debtors' enterprise value.
See Supplemental Letter at 3.
id.
Paul K. Schwartzberg
Page 6
KIRKLAND &_ELLIS LLP
In sum, the Equity Holder Group has offered no credible evidence to prove the Debtors'
solvency or otherwise establish any likelihood (let alone a substantial likelihood) of receiving a
meaningful distribution from the Debtors' estates. The Supplemental Letter also fails to address
how the interests of equity holders are not adequately represented in these chapter 11 cases. As
highlighted in the Debtors' Initial Response, equity holders are adequately represented by
various parties, including the official conunittee of unsecured creditors and the board of trustees
of Innkeepers USA Trust, both of whom have a duty to maximize the value of the Debtors'
estates for the benefit of all constituencies. In light of these facts, the Debtors strongly reaffmn
their position that the appointment of an official equity conunittee is inconsistent with applicable
law and that granting such extraordinary relief is unwarranted in these chapter 11 cases. For
these reasons, the Debtors urge the U.S. Trustee to de th Equity Holder Group's request.
cc: Martin J. Bienenstock
Lorenzo Marinuzzi
Since ely,
Anup Sathy, P.C.
EXHIBIT 6
Anup Sathy, P.C.
To Cal! Writer Directly:
(312) 862-2046
anup.sathy@kirkland.com
KIRKLAND &. ELLIS LLP
AND AFFILIATED PARTNERSHIPS
300 North LaSalle Street
Chicago, Illinois 60654
(312) 862-2000
www.kirkland.com
August 23, 2010
Facsimile:
(312) 862-2200
VIA HAND DELIVERY AND E-MAIL CONFIDENTIAL
PaulK. Schwartzberg
Office of the United States Trustee
Southern District of New York
33 Whitehall Street
New York, New York 1 0004
Re: In re Innkeeoers USA Trust, et aL, No. 10-13800 (SCC)
Response to Request for Official Equity Committee
Dear Mr. Schwartzberg:
The Debtors have reviewed the Equity Holder Group's latest e-mail correspondence and
t:mequivocally standby their recommendation that the U.S. Trustee should deny the Equity
Holder Group's request for an official equity committee in these chapter 11 cases.
1
In its three
attempts, the Equity Holder Group has still failed to offer a single shred of credible evidence
suggesting that there is a substantial likelihood equity holders will receive a meaningful
distribution in these chapter 11 cases. Moreover, the Equity Holder Group has failed to
demonstrate how the interests of equity holders are not adequately represented in these
chapter ll cases. As set forth in the Debtors' Initial Response, it is undisputable that the Equity
Holder Group bears the burden of proving each of these factors. Nonetheless, the Equity Holder
Group appears to believe it can continue to advance unsubstantiated claims suggesting that this
should shift the burden of disproving each of them to the Debtors. This is simply not the law.
As explained in more detail below, the Equity Holder Group's latest e-mail
correspondence advocating for the appointment of an official equity committee should be
dismissed for the following reasons:
Hong Kong
On July 28, 2010, the Equity Holder Group submitted its initial letter (tl1e "Initial Letter") requesting the
appointment of an offici.al equity committee. The Debtors responded to the Equity Holder Groups' Initial Letter
on August 10, 2010 (the "Initial Response"). On August 11, 2010, the Equity Holder Group submitted a
second letter to the U.S. Trustee supplementing their Initial Letter (the "Supplemental Letter"). The Debtors
responded to the Supplemental Letter on August 17, 2010 (the "Supplemental Response"). This letter hereby
incorporates all of the facts and arguments set fOrth in the Debtors' lnitial Response and Supplementa1
Response. All capitalized terms used but not otherwise defmed herein shall the meaning ascribed to them in the
Debtors' Initial and Supplemental Response.
London Los Angeles Munich New YorK Palo Alto San Francisco Shanghai Washington, D.C.
Paul K. Schwartzberg
Page 2
KIRKLAND & ELLIS LLP
First, the Craven Declaration, the Five Mile DIP Motion, and the Lehman DIP Motion
[Docket Nos. 23-24, 33] clearly provide that the seven properties referenced by the Equity
Holder Group (i.e., the hotels that are not pledged as part of the Midland-fixed rate CMBS loan
or the Lehman-floating rate loan) are encumbered by substantial prepetition obligations. \Vhile
the Debtors explained as much in their Supplemental Response (in addition to the pleadings
mentioned above), the Debtors now refer the Equity Holder Group to the following sections of
the Craven Declaration to eliminate any doubt that all seven of the hotel properties listed below
are encumbered by an aggregate total of $230 million in funded prepetition secured debt, all of
which stands before the interests of equity holders:
2
Hilton Suites (Anaheim, Califomia). This hotel-property is pledged as collateral under
the $13.7 million Anaheim Mortgage Loan. In addition, the equity interests of the fee
owner of such hotel-property are pledged as collateral under the $21.3 million Anaheim
Mezzanine Loan .. See Craven Declaration
Residence Inn. (San Diego, California). This hotel-property is pledged as collateral
under the $47.4 million Capmark Mission Valley CMBS Mortgage Loan. Id. '!132.
Residence Inn (Garden Grove, California). This hotel-property is pledged as collateral
under the $37.6 million Capmark Garden Grove CMBS Mortgage Loan. Id. '!133.
Hilton (Ontario, California). This hotel-property is pledged as collateral under the
$35.0 million Capmark Ontario CMBS Mortgage Loan. ld. '!134.
Double Tree Guest Suites (Washington, D.C.). This hotel-property is pledged as
collateral under the $25.6 million Merrill Lynch Washington D.C. CMBS Mortgage
Loan. Id.
Residence Inn (Vienna, Virginia). This hotel-property is pledged as collateral under the
$25.2 million Merrill Lynch Tyson's Corner CMBS Mortgage Loan. Id. 36.
Homewood Suites (San Antonio, Texas). This hotel-property is pledged as collateral
under the $24.2 million Men-ill Lynch San Antonio CMBS Mortgage Loan. Id. 37.
Indeed, the Debtors have stipulated, acknowledged, and agreed that all of the applicable lieru; and securities
interests granted to the mortgage lenders under each of the loans referenced above are "valid, perfected, and
enforceable liens and security interests." See Interim Order (A) Authorizing the Debtors to (!) Use the
Adequate Protection Parties' Cash Collateral and (II) Provide Adequate Protection to the Adequate Protectjon
Parties Pursuant to 1 I U.S. C. 361, 362, and 363, and (B) Scheduling a Final Hearing Pursuant to
Bankruptcy Rule 400l(B) [Docket No. 54], C, pp. 8-20. These stipulations, acknowledgments, and
agreements did not extend to the floating rate or Anaheim mezzanine loans because tj1ese loans are not secured
by cash collateral.
Paul K. Schwartzberg
Page 3
KIRKLAND &. ELLIS LLP
In addition to standing behind these obligations, the interests of equity holders are also
subject to the Debtors' DIP obligations (assuming the financings are approved and
consummated), other secured claims, administrative claims, priority claims, and unsecured
claims, including intercompany claims. Accordingly, there is not a substantial likelihood that
equity holders will receive a distribution in these chapter ll cases under a strict application of
the absolute priority rule.
Second, the Equity Holder Group (not the Debtors) failed to disclose Apollo's admission
in its Quarterly Report that its preferred shares have no value. Despite conveniently omitting this
impmiant fact, the Equity Holder Group would now have the U.S. Trustee believe that both the
Debtors and the Committee have failed to connect the proverbial dots. To be clear, it was the
Equity Holder Group, in the first instance, that pointed to Apollo's Annual Report as evidence of
equity value and elected got to disclose the results of Apollo's Quarterly Report. If there is any
negative inference that can he drawn by the divergence of Apollo's estimates in its SEC filings,
the Equity Holder Group should have pointed it out in its Supplemental Letter. Instead the
Equity Holder Group waited to be called out on its glaring omission and in a last-ditch effort to
save face, has boldly implied that tl1e Debtors and the Committee are trying to conceal
sometl1ing. The Debtors and the Committee have simply pointed out the inconsistencies in the
Equity Holder Group l s position &'1d its selective rnet..l-]_ods of disclosure.
That being said, whatever value Apollo chose to assign to its preferred shares six months
ago is not probative of the value of these shares today and does not prove that equity holders will
be entitled to a meaningful distribution in these chapter 11 cases. Recoveries under any
chapter 11 plan in these cases will be influenced by, among other factors, (a) the value of the
Debtors' estates in connection with their chapter 11 plan and (b) the rights and priorities of
creditors under the Bankruptcy Code. In light of the Debtors' capital structure and the
obligations that s t ~ m d before equity interests, the Equity Holder Group is not able to prove that it
is substantially likely that it is entitled to a meaningful' recovery uuder a strict application of the
absolute priority rule. The Equity Holder Group has not presented any credible evidence proving
otherwise; thus, its request for an official committee should be denied.
Third, the Equity Holder Group has failed to demonstrate that the interests of equity
holders are not adequately represented in these chapter 11 cases. Instead, the Equity Holder
Group believes it is entitled to official status merely because the Debtors' preferred shares are
being extinguished. The Debtors respectfully submit that if this were the standard under
section 1102(a) of the Bankruptcy Code, an official equity committee would exist in nearly every
chapter 11 case. This is not the case. The appointment of an equity committee, as so many
courts have pointed the out, is an extraordinary remedy that should be rarely granted. See. e.g,,
In re Charter Conm1c'ns, Inc., No. 09-11435 (JMP) (Bankr. S.D.N.Y. June 17, 2009); In re
Spansion, Inc., 421 B.R. !51, !56 (Bankr. D. DeL 2009).
Paul K. Schwartzberg
Page4
KIRKLAND &. ELLIS LLP
The Equity Holder Group also takes issue with the Debtors' position that equity holders
have demonstrated a capability of representing tbeir own interests without an official equity
committee. While the Debtors do not believe that whenever parties take steps to protect
themselves they arc per se adequately protected, the Debtors do note that courts have taken into
account the ability of ad hoc groups to represent the interests of equity holders without official
committee status. Spansion, 421 B.R. at 156 (denying motion to appoint an equity committee
while noting that tbe ad hoc equity group was "well organized, well represented by counsel, and
adequate to the task of representing its interests without 'official' status."). Moreover, courts
have also held that the statutory focus of section ll02(a)(2) is not whether shareholders are
exclusively represented, but whether they are adequately represented. In re Williams Commc'ns
Group, Inc., 281 B.R. 216, 223 (Bankr. S.D.N.Y. 2002). As mentioned in the Debtors' Initial
Response and Supplemental Response, tbe interests of equity holders are not only adequately
represented by the Equity Holder Group itself, but also by tbe Committee and the Board. The
Equity Holder Group has not provided any evidence suggesting that tl1e Committee or the Board
have breached their fiduciary duties or that the Equity Holder Group is incapable of representing
tbe interests of equity holders throughout these cases. As such, the Debtors respectfully submit
that the Equity Holder Group's request should be denied.
cc: Martin J. Bienenstock
Lorenzo Marinuzzi
Sincerely,
AM\f S : ~ ; f c /'tJc:-
Anup Sathy, P.C.
EXHIBIT 7
MORRISON I :FOERSTER
August l 0, 2010
VIA UPS and E-MAil"
PaulK. Schwartzberg, Esq.
Office of the United States Trustee
33 Whitehall Street, 21st Floor
New York, NY 10004
Re: Docket No. 10-13800 (SCC)
In re Innkeeuers USA Trust et al.
Dear Paul:
I290 AVENUE OF THE AMERICAS
NEw YoRK
MORltlSON & fOEll.STER LLP
NEW YORK, SAN FllANClSCO,
lOS ANGELES. PALO ALTO,
NEw YoRK ro1o4-oo5o
TE LE PH 0 N E: 2.12-468. 8ooo
F ACS IM I LE ;2 I 2.468. 79 00
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SA-N DIJJGO, WASf-llNGTON, D.C
NORTH:)!.N VIRGlN[A, DENVER.
SJ,CRAMENTO, WALNUT CREEK
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BEl)ING, SHANGHAI, HONG KONG
Writer) s Direct Contact
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LMarinuzzi@mofo.com
Morrison & Foerster LLP is proposed counsel to the Official Committee of
Unsecured Creditors (the "Committee") oflnnkeepers USA Trust, et al. (the "Pebtors"). We
reviewed the July 28, 2010, letter sent to you on behalf of certain preferred shareholders (the
"Equity Holders") requesting that your office appoint an official committee of equity security
holders (the "Request"). This letter is written on behalf of the Committee to express the
Committee's view that an equity committee should not be appointed in the Debtors' cases.
The Committee strongly urges the Office of the United States Trustee (the 'Trustee") to deny
the Equity Holders' request.
As you are aware, the prevailing legal precedent in the Southern District of New
York provides that the appointment of an official equity committee in a chapter 11 case
should be the "rare exception" and should not occur unless "(i) there is a substantial
likelihood that [equity holders] will receive a meaningful distribution in the case under a
strict application of the absolute priority rule, and (ii) [equity holders] are unable to represent
their interests without the formation of an offi.cial committee." In re Williams Commc 'ns
Group, Inc., 281 B.R. 216,223 (Bankr. S.D.N.Y. 2002) ("Williams"). Moreover, a party
making a request for the appointment of an official equity committee bears the burden of
demonstrating the debtor's solvency and necessity offonnaiion due to the lack of adequate
representation. !d.
The Request fails to satisfy this bmden as it relies on an unsupported supposition
regarding the Debtors' net equity value and fails to establish why the formation of an official
equity committee is necessary. The Equity Holders' arguments for the appointment of an
ny-935!41
MORRISON I FOERSTER
PaulK. Schwartzberg, Esq.
August 10,2010
Page Two
equity committee resort to pleadings that "Apollo delisted and deregistered Innkeepers,
thereby depriving the prefened shareholders of the protections of Sarbanes Oxley," and
"Innkeepers' management and directors are affirmatively attempting to extinguish preferred
shareholders." Regardless of their veracity, neither of these statements provides a basis in
law to justify the appointmer1t of an equity committee in this case.
COMMITTEE POSITION
As set fmih in Williams, the threshold issue in determining whether to appoint an
equity committee is whether the Debtors will have any equity value upon confirmation of a
plan of reorganization. See also In re Emons Indus., Inc., 50 B.R. 692, 694 (Banlcr. S.D.N.Y.
1985) (holding that "generally no equity committee should be appointed when it appears that
a debtor is hopelessly insolvent because neither the debtor nor the creditors should have to
bear the expense of negotiating over the terms of what is in essence a gift"). The Equity
Holders bear the burden of proving the Debtors' solvency for purposes of the Request See
Williams, 281 B.R. at 223; In re Ampex Corp., 2008 Bankr. LEXIS 1536, *4 (Banlcr,
S.D.N.Y. May 14, 2008) ("Amoex"). The Equity Holders assert that statements contained in
the first day affidavit of Dennis Craven (the "Craven Affidavit") and EBITDA multiples for
unspecified "comparable high-end companies" indicate that "there may well be equity for the
prefened shareholders'' Mere speculation does not amount to a "substantial likelihood that
[equity holders] will receive a meaningful distribution in the case." In particular, the Equity
Holders fail to satisfy the requisite burden of proof because they rely heavily on the
estimated amount of assets and liabilities cited in the Craven Affidavit, which are based on
book values that, as you well understand, are largely inelevant and unreliable in bankruptcy
cases.
The Committee notes that it is very early in the Debtors' chapter ll cases and only
the most limited analysis regarding the extent of the Debtors' solvency or lack thereof by the
Committee has even been possible. However, based on discussions with the Debtors and a
initial assessment conducted by Jefferies & Company, Inc. ("Jefferies"), the Committee's
proposed financial advisor, the Committee's preliminary belief is that the Debtors will have
little or no equity value upon their emergence from bankruptcy. Even if an individual
property held by the Debtors has net equity value, that value will be available to the Equity
Holders only after it has first been channeled up the corporate structure and used to satisfy
outstanding mezzanine debt and unsecured creditors' claims. Based on its initial review of
documents provided by the Dehtors, Jefferies believes that it is unlikely any meaningful
value will remain once the post-petition super-priority secured lenders, administrative
claimants, mezzanine debtholders and unsecured creditors' claims are fully satisfied.
Moreover, appointing an equity committee before Jefferies has had the opportunity to
ny-935 141
MORRISON I FOERSTER
PaulK. Schwartzberg, Esq.
August 10,2010
Page Three
conduct a full analysis to verify the Debtors' position would be premature and could
potentially give rise to a significant waste ofthe estates' assets.
Under the second Williams prong, an official equity committee should only be
appointed where equity holders' interests cannot o t h e m ~ s e be adequately represented.
Section II 02(a)(2) of the Bankruptcy Code requires that the appointment of an equity
committee be "'necessary,' a high standard that is far more onerous than if the statute merely
provided that a committee be 'useful."' In re Oneida Ltd., 2006 Banlcr. LEXIS 780 (Banlcr.
S.D.N.Y. May 4, 2006). Factors examined by the bankruptcy courts in this District on the
issue of adequate representation include (i) "the role of a creditors' committee," (ii) "the role
of the board and management acting on behalf of shareholders," (iii) "the sophistication of
shareholders and their ability to retain counsel" and (iv) "the right of shareholders to be
compensated under 11 U.S. C. 503(b) of the Banlcruptcy Code if they effect a 'substantial
contribution' in the case_" Ampex, 2008 Banl<r. LEXIS 1536,*2-3. There are several reasons
why the adequate representation prong of Williams is not satisfied here.
First, assuming arguendo that, as suggested in the Request, the Debtors are unable in
accordance with their fiduciary obligations to maximize the value of their estates due to the
motivations oflnnkeepers' controlling owner, the Request nonetheless fails to cite any
rea;on why the interests of the Equity Holders will not be pursued adequately by the
Committee or Midland Loan Services, Inc. To the extent that the Debtors are not taking
appropriate actions, the Committee has a strong interest in taking the necessary actions, since
maximizing the value of the Debtors' estates is in the best interests of both unsecured
creditors and equity holders. In another recent ease in this district, an official committee of
unsecured creditors that stood to receive a I 0% recovery was found to have interests aligned
with equity. Ampex, 2008 Banlcr. LEX!S 1536, *6 ("[T]he Creditors Committee,
representing a constituency receiving a I 0% recovery, is aligned with equity at this point.
The Creditors Committee ... is incentivized to seek maximum recoveries generally."). An
official equity committee would merely duplicate the efforts of the Committee and generate
unnecessary incremental costs to the Debtors' estates through, among other things, the hiring
of separate counsel and financial advisors.
Second, the appointment of an equity committee and the attendant costs associated
with such a committee will burden the estates with even greater administrative expenses,
namely the cost of additional professionals for the equity committee. Such additional
expenses are unnecessary in this case, especially where the Equity Holders are fully capable
of representing their interests in this case without the need for an official committee. See id.
(ncting that the fact that the shareholder is a sophisticated party represented by counsel who
has and will likely pursue its objections in the disclosure and confirmation hearings is a
factor weighing against appointment of an equity committee). The refusal of the Trustee to
ny-935141
MORRISON FOERSTER
PaulK. Schwartzberg, Esq.
August 10, 2010
Page Four
appoint an official committee to represent the Equity Holders does not preclude their
involvement in the Debtors' chapter 11 cases. See, e.g., US. Bank Nat'! Assoc. v.
Wilmington Trust Co. (In re Sponsion, Inc), 426 B.R. ll4, 120 (Banla. D. DeL 2010)
(observing that, although the bankruptcy court had denied a shareholder's request for
appointment of an official equity committee, the shareholder continued its active
participation in the case). If equity does somehow end up being "in the money," and the
Equity Holders were active in the process, they would be free to seek to have their costs
allowed as a "substantial contribution" to the case pursuant to Section 503(b)(3)(D) of the
Bankruptcy Code. Indeed, one of the requesting parties, Esopus Creek Advisors, is doing
just that in the banlcruptcy case of In re .\)Jansion, et al., Case No. 09-10690 (Banla. D.
Del.).
1
The Debtors' estates should not be forced to bear the burden of the Equity Holders'
costs based on an unsubstantiated assertion of speculative equity value.
Under the totality of the circumstances, the appointment of an official equity
committee in Ll:tese cases is unjustified and will only serve to delay the administration of the
cases and increase costs at the expense of the Debtors' unsecured creditors, which will
almost certainly bear significant impairment of their claims. The facts available at this
preliminary stage of the Debtors' chapter 11 cases demonstrate that there is very little
possibility of a recovery to equity. There are also no facts to indicate that the Equity
Holders' interests are not adequately represented by the Committee, or that an official eqiJity
committee is necessary to adequately represent the Debtors' preferred shareholders. Further,
the denial of the request to appoint an equity committee will not prejudice the rights of the
Equity Holders to participate in these cases.
In light of the admonishment contained in Williams ll1at the appointment of an
official equity committee in a chapter 11 case should be a rare exception, and only granted
where the totality of the circumstances demand it, the Committee respectfully requests that
; lvfotion.for Payment a/Administrative Expenses/Claims Application for Payment of Professional Fees and
Expenses Pursuant w Section 503(b)(3) and (4) of the Bankruptcy Code Filed by Ad Hoc Commiltee of
Convertible Noteholders, filed on July 7, 2010 [Docket No. 3826].
ny-935141
MORRISON FOERSTER
PaulK. Schwartzberg, Esq.
August 10,2010
Page Five
the United States Trustee deny the Request.
cc: Anup Sathy, P.C.
Members of the Creditors' Committee
ny-935141
Sincerely,
UZZl
EXHIBIT 8
129QAVENUEOF"l'l-IEt\lVfERTC/\S \JOHRISI)N . ).1.1'
MORRISON FOERSTER
August 17, 2010
VIA UPS and E-MAIL
Paul K. Schwartzberg, Esq.
Office of the United States Trustee
33 Whitehall Street, 21st Floor
New York, NY 10004
Re: Docket No. 10-13800 (SCC)
In re Innkeepers USA Trust. ct al.
Dear Paul:
;--.JE\\1 'iORK. N'{ 10104-0050
TEl.EPHONE: 212.4Ml.8000
Fi'I.CSfM!LE: 212.4-68.7900
VN/IJ/.MOFO.COlvL
'H'-" YDIU.::. 5Ak FRANCISCO.
LOS M:l;EL!JS. !'Al.O ALTO,
SA"' ::J!IC(;Q, WASHINGTQ.'i, D.C
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$AC:R,\MU>1T0, W,ILNUT
TOI(\'0, l.ONDUN, f>RUSSIILS,
1-1()1-JG
Writer's Direct Contact
212.468.8045
LMarinuzzi@mofo.com
As you know, Morrison & Foerster LLP is proposed counsel to the Official
Conm1ittee of Unsecured Creditors (the "Committee") oflnnkeepers USA Trust, et al. (the
"Debtors"). We reviewed the August 11, 2010, letter sent to you on behalf of certain
prefe!Ted shareholders (the "Equitv Holders") renewing their request that your office appoint
an official committee of equity security holders (the "Request"). This letter is written on
behalf of the Committee to express its continuing view that an equity committee should not
be appointed in the Debtors' cases. The Committee strongly urges the Ot1ice ofthe United
States Trustee (the "Trustee") to deny the Equity Holders' request.
The Committee renews and restates each of the arguments made in its letter to you
dated Augnst J 0, 2010 (the "Initial Committee Response"). In addition, the Committee has
the following responses to each of the points made in the Request, which are apparently
intended to support the proposition that the Debtors have net equity value:
l. Value of 12% Preferred Shares. The Reqnest asserts that, according to the
Form l 0-K filed by Apollo Investment Corp. ("ADollo") with the Securities
and Exchange Commission ("SEC") on May 26, 2010, there is equity in
Apollo's 12% Series A Cumulative Preferred Shares (the "12% Preferred
Shares"). The Request bases this conclusion on the reported value of the
12% Preferred Shares as of March 3 L, 2010. However, the Request fails to
point out that on August 4, 2010, Apollo filed its Form 10-Q, which reported
thal as of June 30,2010, the 12% Preferred Shares were valueless
1
But even
assuming, arguendo, that the reported value of the 12% Preferred Shares was
accurate as of March 31,2010, this point is nonetheless iiTelevant for a
number of reasons. First, this estimated March 3 L 2010, "fair value" of the
1
Sec the Apollo Form 10-Q filed on August 4, 2010 at p. 13, attached hereto.
ny937075
MORHlSON I FOERSTER
PaulK. Schwartzberg, Esq.
August 17, 20!0
Page Two
12% Preferred Shares fails to take into account the fact that there is no readily
accessible market in which these shares could be monetized and any
monetization would involve substantial costs, time, and uncertainty.
Moreover, the Debtors' Preferred Shares have not paid a cash dividend since
2008. In view of this, any attribution of value to the Preferred Shares at this
point in time is highly speculative and, as indicated in Apollo's recent Form
1 0-Q, not indicative of value.
2. Refinancing of Raleigh Propcrtv. The Request points to the recent
refinancing of real property in which a non-debtor affiliate of the Debtors,
KPA Raleigh N ("Raleigh"), holds a minority interest, as evidence that there
is equity value in one of the properties. The conclusion that there is equity
value in the refinanced property is mere speculation. Significant details of
this transaction would have to be thoroughly reviewed prior to concluding that
there was equity value in the property, including, for example, the specific
terms of the refinancing, the capitalization and credit-worthiness of the
majority owner, and the status of the related property tax appeal.
Notwithstanding a detailed review of this information, it is apparent
that the conchsion drawn by the Equity Holders is questionable. The Request
glosses over a number of important considerations, including: (i) Raleigh,
which is not a Debtor in these proceedings, holds only a minority interest
(49%) in the proper1y; (ii) tire property's value and operations are subject to
the control of the majority and (iii) there is no evidence that any equity
value would even be accessible to Raleigh, much less to the other Debtors and
their creditors. The Request also relies on an unsubstrurtiated assumption that
the property value has increased since November 2009. However, the
Request does not provide any support for this proposition. Moreover, values
are subject to many property-specific factors including local market dynamics,
and, in the absence of any evidence to support it, this statement by the Equity
Holders has no probative value.
3. Reauest to Pledge Properties Not Par1 of Lehman Collateral. The Request
also asserts that the Debtors' pledge of two propenies that are not encumbered
by mortgages in favor of Lehman ALI, Inc. ("Lehmar]") as collateral for the
proposed debtor in possession financing to be provided by Five Mile Capital
Partners LLC ("Five Mile") is proof that there is equity value in such
properties. However, the inclusion of these properties in Five Mile's
collateral package does not provide !illY evidence that there is equity value in
these properties. Rather, it simply indicates thal Five Mile is taking actions
typical of other debtor in possession lenders by seeking to secure loans made
to a high risk bonower by obtaining liens on properiy of the Debtors,
inespective of the value of such property. In fact, the properties are already
encumbered hy lenders other than Lehman. Although it is true that the grant
of priming liens on the pledged properties in favor of Five Mile increases the
ny-937075
MORRISON I FOERSTER
PaulK. Schwartzberg, Esq.
August 17, 2010
Page Three
threshold for recovery to the Equity Holders, claims of the properties' secured
lenders and all unsecmed creditors are entitled to any value ahead of the
preferred shareholders.
4. DSCRs of Properties Outside Lehman's Mortgaf!es. The Request asserts that
at least five hotels that are not secured by liens in favor of Lehman have
equity value, based on an analysis of the Debt Service Coverage Ratios
("DSCRs") of each property. Reliance on DSCRs as an indicator of equity
value is flawed, as DSCRs can fluctuate significantly
2
More importantly,
contrmy to the statement contained in the Request, a DSCR > 1 .OOx does not
imply solvency. To the contrary, DSCR measures only the short-tenn ability
of a debtor to pay debts as they come due, ignoring any long term obligations.
ll does not imply anything at all with respect to the "balance sheet test" or
whether the value of the entity's assets exceeds its total liabilities. Further,
even if there is equity value in some or all of the seven properties identified in
the Request, such value will be exhausted satisfying the intervening claims of
other creditors, including mezzanine and nnsecured claims at the entities that
own the seven properties m1d general unsecured claims at the corporate level,
before it ever reaches the Debtors' shareholders, rendering the existence of
any equity value in those properties a moot point for purposes of the Request.
As set forth above, each of the points raised by the Reqnest relies on unsupported and
misguided speculation and fails to establish either that the Debtors have any significant net
eqnity value or that the formation of a11 official equity committee is necessary. The
Committee would like to reemphasize that, in light of the significant amount of uncertainty
regarding the Debtors' position at this early stage of these cases, the Request is premature at
best Moreover, the Committee notes that the Equity Holders are fully capable of advancing
their interests without the appointment of a formal Conunittee as evidenced by their recently
filed motions to appoint an examiner in these cases. Accordingly, the Committee
respectfully renews its request that the United States Trustee deny the Request
Since y,
annuzz1
cc: Marlin J. Bienenstock, Esq.
Anup Sathy, P.C.
Members of the Creditors' Commit oo
2
Because the Request fails to provide details regarding the Bloomberg data it used to generate its
DSCR figures, the Committee's financial advisors are unable to provide a full critique of the DSCRs
selected by the Equity Holders at this time,
ny-937075
EXHIBIT 9
MORRISON I FOERSTER
Aut,'Ust 23, 2010
VIA COURIER and E-MAIL
Paul K. Schwartzberg, Esq.
Office of the United States Trustee
33 Whitehall Street, 21st Floor
New York, NY l 0004
Re: Docket No. 10-13800 (SCC)
In re Innkeepers USA Trust. eta/.
Dear Paul:
1290.'\VNUEOFTHEAMt<:JUC\S r.lO!t;USOh' FOEllHGR u.l'
NEW YORK, NY 1010+0050 NEW YO I!!:, r.ft.\NCISCO,
TELEPHONE: 212.468.8000
FACSIMILE: 212.468.7900
\Y/'\1/VJ.MOFO.COM
1'.'\1,(\ .\LTD,
EAC.' Pll-iGO, 1'\'ASHINGTDN, D.C.
\'lRGIXIA, D2h'\'iil;,
S,\CRt .. ll2N':"O, \Vi\C.NI!T (.i(I'.2K
TDK\'0, LCl:-iDOX,
tlRIJINCi, >l-IANG I, KON:J KONC
Writer's Direct Contact
2!2.468.8045
LMarinuzzi@mofo.com
We reviewed the August 19, 2010, e-mail sent to you on behalf of certain preferred
shareholders (the "Eauitv Holders") regarding their request that your office appoint an
official committee of preferred shareholders (the "Reouest"). This letter is written on behalf
of the Official Creditors' Committee to express its continuing view that an equity committee
should not be appointed in the Debtors' cases.
The Equity Holders will have you believe that Apollo purposely de-valued its
preferred shares as of June 30,2010 because "it had already determined to wipe out all
equity," and that the value reflected in Apollo's May 26, 2010 SEC filing is a more accurate
representation of the purported value of the 12% Series A Cumulative Preferred Shares.
Rather than consider reasonable possibilities for the write-down in value by Apollo, the
effects on that value caused by the bankruptcy filing, or address the substantive counter-
points raised by the Committee on this issue in its August 17 Letter, the Equity Holders
simply resort to proffering conspiracy theories in support of the Request. Unfortunately,
unsubstantiated theories alone are not enough to justify the appointment of an official equity
committee,
Moreover, the Equity Holders do not contest that they are adequately represented, but
instead, assert that they should not have to bear the cost of their fight. The appointment of an
equity committee is not a matter of right, but something that must be warranted under
stringent legal authority, and the Equity Holders have yet to demonstrate that there is
ny-938002
MORRISON I FOERSTER
PaulK. Schwartzberg, Esq.
August 23, 2010
Page Two
sufficient equity value in these estates to warrant the appointment of an official committee of
preferred shareholders.
As a final matter (and we suspect the Debtors will also have addressed this in their
reply), the seven (7) hotel properties not subject to the Lehman's blanket mortgage are
already encumbered by lenders other than Lehman.
1
The Equity Holders ignore the distinct
possibility that if there is equity at these properties- which the Committee does not believe
is the case- that equity value will need to first satisfy any administrative and general
unsecured claims at interceding entities in the Debtors' corporate structure, thereby fmiher
diminishing any chance of providing the preferred shareholders with any recovery on their
interests, let alone a meaningful one.
In sum, the Equity Holders have not provided you with any objective, rational
argument that demonstrates the existence of equity flowing up to the preferred shareholders.
Rather, the Equity Holders continue to proffer their conspiracy theories. For the reasons
stated herein and in our prior correspondence, the Official Creditors' Committee respectfully
requests that the U.S. Trustee deny the Request.
Sincerely,
Lorenzo Marinuzzi
cc: Martin J. Bienenstock, Esq.
Anup Sathy, P.C.
Members of the Creditors' Committee
1
See Amended Declaration of Dennis Craven, Chief Financial Officer oflnnkeepers USA Trust, in Suppo1i of
First-Day Pleadings [Docket No, 33].
ny-938002
EXHIBIT 10
U.S. Department of .Justice
Oflice of the United States Trustee
Southern District ofNew York
- - - - - - - - - ~ - - - - - - - - - - ~ - - - - - - - - - - - - - - ------------ ------- --------
Martin J_ Bienenstock, Esq_
Dewey & LeBoeuf, LLP
1301 Avenue of the Americas
New York. NY 1 0019-6092
New Yo1-L NY 10004
August 30, 2010
Re: Innkeepers USA Trust, et. al, 10-13800 (SCC): Request for Equity Committee
Dear Mr_ Bienenstock;
Phone i2 i ~ ) 51 U !)50(:
["t1X 1212) M8-22:i5
On July 28,2010, this Office received your letter (the "Letter") dated July 28, 2010, requesting
that the United States Trustee appoint an ofi!cial committee of preferred shareholders (an "Equity
Committee") in the bankruptcy cases oflnnkecpers USA Trust and its affiliated debtors (collectively, the
"Debtors"). This Office also received your August 11, 2010 letter and August 19, 2010 email
(collectively, the "Supplements") supplementing your Letter.
The United States Trustee forwarded your Letter and the Supplements to counsel for the Debtors
and counsel for the Official Committee of Unsecured Creditors (the "Creditors' Committee"), requesting
their clients' views regarding the Letter and Supplements. By letters dated August 10, 2010, August 17,
2010 and August 23,2010, the United States Trustee received responses (the "Responses") from the
Creditors' Committee and the Debtors to the Letter and the Supplements.
The United States Trustee has reviewed the Letter and the Supplements memorializing your
request for an Equity Committee and the Responses thereto. Based upon her consideration of the
foregoing and the circumstances of these cases, the United States Trustee declines to appoint an Equity
Committee in these cases at this time_
cc: Anup Sathy, Esq.
Brett H. Miller, Esq.
Very truly yours,
TRACY HOPE DAVIS
UN1TED STATES TRUSTEE
By Is/ PaulK Schwartzbero
Paul K. Schwartzberg
Trial Attorney