Attorneys For Midland Loan Services, Inc

HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, NY 10020 Telephone: (212)
659-7300 Facsimile: (212) 918-8989 Lenard M. Parkins (NY Bar #4579124) John D. Penn (NY Bar #4847208 and admitted pro hac vice) Mark Elmore (admitted pro hac vice) Attorneys for Midland Loan Services, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered
OBJECTION TO APPLICATION FOR THE ENTRY OF AN ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF MOELIS & COMPANY LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS NUNC PRO TUNC TO THE PETITION DATE Midland Loan Services, Inc. (Midland),1 in support of its Objection to the Application for the Entry of an Order Authorizing the Retention and Employment of Moelis & Company LLC as Financial Advisor and Investment Banker for the Debtors, represents:
Midland pursuant to the Servicing Agreement services and administers that certain secured loan in the amount of not less than $825,402,542 plus interest, costs and fees (the Fixed Rate Mortgage Loan) owed by certain of the Debtors. The Fixed Rate Mortgage Loan was made pursuant to that certain loan agreement dated as of June 29, 2007 (as amended, the Fixed Rate Mortgage Loan Agreement), and is evidenced by (i) a certain Replacement Note A-1 and (ii) a certain Replacement Note A-2, each dated as of August 9, 2007, and each in the original principal amount of $412,701, 271. Replacement Note A-1 was assigned to LaSalle Bank National Association as trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007-C6. Bank of America, N.A. is the successor-in-interest to LaSalle Bank National Association (the Fixed Rate Trustee). Replacement Note A-1 is currently held by the Fixed Rate Trustee. Replacement Note A-2 was assigned to and is currently held by the trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007-C7.
OBJECTION TO APPLICATION FOR THE ENTRY OF AN ORDER AUTHORIZING THE RETENTION AND EMPLOYMENT OF MOELIS & COMPANY LLC AS FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE DEBTORS NUNC PRO TUNC TO THE PETITION DATE F-283662
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1.
Midland objects to the retention of Moelis as requested by the Debtors. Under the
circumstances of this case, wholly created by the Debtors, the Application to Employ Moelis is premature and the proposed compensation (particularly the Restructuring Fee) is unreasonable. 2. As an initial matter, the provision outlining a proposed $6 million fee for a
Restructuring Transaction should be clarified regarding whether such a fee would be payable if the plan described in the Craven Declarations and the proposed plan support agreement2 (the PSA/Lock-Up) is confirmed. The definition of Restructuring Transaction includes an exclusion for a transaction in favor of Apollo Investment Corporation (Apollo).3 The Debtors and Moelis should specifically state whether the plan described in the Craven Declarations and PSA/Lock-Up would qualify Moelis for the Restructuring Fee. 3. Additionally, Moelis must disclose, subject to cross-examination the extent of its
role in pursuing the PSA/Lock-Up designed to provide Apollo with at least 50% of the equity in the reorganized Debtors. The Court and the estates are entitled to transparency on how this proposal came to pass with Moelis at the table as a fiduciary for the estates. Moelis should
The Plan Support Agreement includes punitive remedies provisions in favor of Lehman ALI, Inc. (Lehman). As such, it is more of a lock-up agreement and will be referred as the PSA/LockUp herein.
Pursuant to the Engagement Letter, a Restructuring Transaction shall mean and include any restructuring, reorganization, rescheduling, or recapitalization of all or any material portion of the Debtors liabilities, however such result is achieved, including without limitation through any one or more of the following means, whether in one or a series of transactions: a plan of reorganization or going concern liquidation (a Plan) confirmed in connection with any case or cases commenced by or against the Debtors or any of their subsidiaries or affiliates, whether individually or on a consolidated basis (a Bankruptcy Case) under the Bankruptcy Code, exchange offer, consent solicitation, covenant relief, rescheduling of debt maturities, change in interest rates, settlement or forgiveness of debt, conversion of debt into equity, other amendments to the terms of the Debtors debt instruments, issuance of new securities (other than to Apollo Investment Corporation or its affiliates (Apollo)), sale or other transfer of equity, assets, or other interests of the Debtors other than to Apollo. (Emphasis added)
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explain how a fiduciary would support the PSA/Lock-Up plan that has no market test of the value of the new equity, no cash flowing from Apollo to the Debtors for Apollos new equity interest as part of the transaction, and a fiduciary out in favor of Lehman (rather than the Debtors or the other creditors). 4. The Application is premature and some sort of retention for Moelis should be
considered only after the Court has ruled upon the PSA/Lock-Up. If the PSA/Lock-Up is approved, employing and compensating Moelis would be unnecessary because there would be no need for its services. If the PSA/Lock-Up is approved, the options for these estates appear to be the plan described therein or forced liquidation. The PSA/Lock-Up contains a host of provisions that make it abundantly clear that, if approved, the Debtors will cede much case control to Lehman going forward and neither the Debtors nor its professionals would be able to do anything material that Lehman had not approved. Moelis could not evaluate proposals from any other parties or seek to improve the treatment of the Debtors creditors because such efforts would be prohibited.4 5. So there would be no doubt regarding the constraints imposed on the Debtors,
Sec. 5(c) of the PSA/Lock-Up also provides Neither Party shall, directly or indirectly, seek, solicit, negotiate, support or engage in any discussions relating to or enter into any agreements relating to, any restructuring, plan of reorganization, dissolution, winding up, liquidation,
Section 4(a) of the PSA provides, in pertinent part, that the Debtors (which would include its professionals) could not (ii) directly or indirectly seek, solicit, negotiate, vote for, consent to, support or participate in the formulation of any plan of reorganization or other restructuring other than the Plan; (iii) directly or indirectly seek, solicit, negotiate, support or engage in any discussions regarding any chapter 11 plan other than the Plan . . . (v) take any other action not required by law that is inconsistent with, or that would materially delay, the confirmation or consummation of the Plan or that is otherwise inconsistent with this Agreement.
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reorganization, merger, transaction, sale or disposition (or all or substantially all of their assets or equity) other than as set forth in the Plan Term Sheet and the Plan . . . . (Emphasis added) 6. At a minimum, these prohibitions would preclude Moelis from undertaking the
following proposed tasks described in paragraph 13 of its Application (p. 7, paragraph 13): b. evaluate the Debtors debt capacity and assist in the determination
of an appropriate capital structure for the Debtors; c. as deemed desirable by the Debtors, identify, initiate, review,
negotiate, and evaluate any Restructuring Transaction, and, if directed, develop and evaluate alternative proposals for a Restructuring Transaction; d. assist the Debtors in developing strategies to effectuate any
Restructuring Transaction; e. advise and assist the Debtors in the course of their negotiation of
any Restructuring Transaction and participate in such negotiations, as requested; f. evaluate indications of interest and proposals regarding any
Restructuring Transaction from current or potential lenders, equity investors, or strategic partners; g. determine and evaluate the risks and benefits of considering,
initiating, and consummating any Restructuring Transaction; ... i. be available at the Debtors request to meet with Debtors management,
board of directors/trustees/managers, creditor groups, equity holders, any official committees appointed in the Chapter 11 Cases to discuss any Restructuring Transaction and provide such parties with information about the Debtors assets, properties, or businesses as may be appropriate and acceptable to the Debtors, subject to customary business confidentiality agreements in form and substance approved by the Debtors;
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j.
assist the Debtors in the development, preparation, and distribution of
selected information, documents, and other materials to facilitate the consummation of any Restructuring Transaction;
7.
Moelis should not be retained and certainly not rewarded for the PSA/Lock-Up
whereby the Debtors consented to being handcuffed from doing what Chapter 11 fiduciaries are supposed to do negotiate to implement a restructure that is in the best interests of all creditors of the estates in open and transparent efforts. This mandate has been violated and this process has been summarily shut down with Moeliss assistance. Lehmans claims are dwarfed by Midlands claims and those of the other secured creditors. Yet, the Debtors with Moelis help, propose to cede control of this case and all the upside of the estates to Lehman. Moelis retention as requested should be denied. 8. The PSA/Lock-Up, if approved, would empower Lehman to control these cases
leaving little, if any, compensable work for Moelis to undertake on behalf of the Debtors. Any action that Lehman had not approved in advance or subsequently deems to be a violation of the PSA/Lock-Up, would allow Lehman to terminate the use of cash collateral for 20 hotels (PSA/Lock-Up, Sec. 8(a)) and, in certain events, immediately place its collateral into liquidation through relief from the automatic stay or otherwise. (PSA/Lock-Up, Sec. 8(b)). a. The Debtors cannot file any motion that Lehman has not approved or that
might delay or prevent the implementation of the Plan. i. PSA/Lock-Up, Sec. 4(a)(i) prohibits the Debtors from taking an
action to object to confirmation of the Plan or object to or otherwise commence any proceeding to oppose, alter, delay or impede or take any other action, directly
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or indirectly, to interfere with entry of one or more orders approving the Plan or other Plan Related Documents. ii. PSA/Lock-Up, Term Sheet, Means of Implementation,
Bankruptcy Pleadings, p. 5 which provides, All material pleadings filed by the Company in connection with the Chapter 11 Cases, including all first-day motions, shall be in form and substance reasonably acceptable to Lehman. b. Even if the Debtors had neither sought nor consented to any relief the
Court might provide to a party, Lehman could determine that an order entered by this Court breached the PSA/Lock-Up.5 9. Many plan support agreements include a fiduciary out provision that recognizes
that debtors-in-possession have fiduciary duties to all of their creditors, not only those who have pre-negotiated a plan with the companys owner. Moelis might argue that the Fiduciary Out provides a potential for compensable work on behalf of the Debtors. This argument is wrong. Even a casual observer must ask the questions: a. What kind of fiduciary out favors Lehman and Apollo and not the other
creditors or the estates? b. Are the Debtors toying with reason, the Chapter 11 process and the other
creditors for the benefit of Lehman and an insider (Apollo), to the exclusion of creditors that dwarf the claim of Lehman? c.
5
If so, how can this ever be sanctioned by a court?
PSA/Lock-Up, Sec. 6(k) defines Termination Event to include The granting by the Bankruptcy Court of relief that is inconsistent with the terms set forth in the Plan Term Sheet or the Plan in any material respect (in each case with such amendments and modifications as have been effected in accordance with the terms set forth in the Plan Term Sheet.
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10.
The Fiduciary Duties section of the PSA/Lock-Up (Sec. 25) is illusory in that
any higher and better offers that might trigger the fiduciary out must be higher and better for Lehman (not for the Debtors or any of their other, and larger, creditors) and requires the Debtors to file a motion to specifically activate the fiduciary out. a. The Debtors would only be able to receive, but not negotiate to improve,
terms for an improved plan. Mere discussions of any such offers are prohibited as well. b. A motion to exercise a fiduciary out could never be filed over Lehmans
objection and if it could, would qualify as Termination Event. c. Lehman could refuse to waive a Termination Event and terminate the
Debtors use of cash collateral before the Debtors could obtain any relief from the Court. 11. The PSA/Lock-Up provisions, individually and taken as a whole, show that there
would be very little need for a firm like Moelis if the PSA were approved. If the Court rejects the PSA/Lock-Up or if the PSA/Lock-Up is approved and then terminated, a firm like Moelis might be engaged at that time to undertake a full evaluation of all of the options that might exist to reorganize one or more of the Debtors pools of hotels. Until either of those occurs, the Application is premature. 12. The conflicting statements between the Application and the engagement letter
regarding the stepped down monthly fee should also be addressed and resolved. The Application provides that the monthly fee beginning in month 6 would be $175,000 (p. 8, paragraph 15) while the engagement letter (which should control) provides it would be $150,000 (p. 3, paragraph 3).
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13.
As the largest secured creditor in these cases, the Midland Cash Collateral would
be the primary cash source of the Debtors in these cases.6 As noted previously in its Objection [Docket No. 36] to the Debtors cash collateral motion [Docket No. 13], Midland does not consent to the use of the Cash Collateral as currently contemplated by the Debtors and specifically objects to the use of the Cash Collateral as the source for the payment of professional fees incurred in (a) the pursuit of the plan of reorganization (the Lehman / Apollo Plan) as described in the Declaration of Dennis Craven [Docket No. 33], and embodied in the PSA/LockUp or (b) otherwise to support any effort to cramdown Midlands secured claim, including as described in the Lehman / Apollo Plan. As fee requests are submitted, Midland will review each such request and anticipates consenting to the use of the Cash Collateral solely for the payment of fees incurred in administering these Chapter 11 cases. To be abundantly clear, Midland will not consent to the use of the Cash Collateral for payment of fees incurred in the Debtors prosecution of the PSA/Lock-Up, the Lehman / Apollo Plan or other efforts to cramdown Midlands secured position. 14. In a typical carve-out situation, a debtor (or other estate professional) is not
entitled to use a secured creditors cash collateral to finance efforts to challenge a secured lenders claims or interests in its collateral. Likewise, Midland specifically objects to the
The Fixed Rate Mortgage Loan is secured by cross-collateralized and cross-defaulted first priority mortgages, liens and security interests on forty-five (45) hotel properties and their contents and assets related thereto (collectively, the Midland Properties) and the other collateral, including all cash collateral as such term has meaning under section 363 of the United States Bankruptcy Code, generated by the Debtors hotel and business operations with respect to the Midland Properties, as set forth in the Fixed Rate Mortgage Loan Agreement. The Midland cash collateral (the Cash Collateral)is comprised of all of the cash collateral as such term has meaning under section 363 of the United States Bankruptcy Code, generated before or after the petition date, from the Midland Properties, including, but not limited to, all profits, rents or proceeds of the Midland Properties.
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Debtors professionals, as estate professionals, using (and effectively surcharging) Midlands cash collateral to advocate the PSA/Lock-Up or the Lehman Plan, which is a direct challenge to Midlands secured position. Flagstaff Food Service Corp., 739 F.2d 73 (2d Cir. 1984) (holding that a secured creditors collateral may not be surcharged unless there is a direct benefit to the secured creditor); In re 680 Fifth Ave. Associates, 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993) (discussing the scenario where estate professionals must forego compensation when there are no unencumbered assets). Midland objects to the Fee Procedures Motion to the extent it seeks to implement fee procedures providing for the use of its cash collateral without its express consent for the payment of estate professional fees incurred in pursuing approval of the plan support agreement, the Lehman / Apollo Plan or the cramdown of its claims. See In re Blackwood Associates, LP, 153 F.3d 61, 68 (2d Cir. 1998) (consent cannot be implied or taken lightly). Local Rule 9013-1(a) 15. This pleading includes citations to the applicable rules and statutory authorities
upon which the relief requested herein in predicated and a discussion of their application to this pleading. Accordingly Midland submits that this pleading satisfies Local Bankruptcy Rule 90131(a). WHEREFORE, Premises Considered, Midland prays that upon hearing the Application, that the Court will either deny the same without prejudice or defer making a determination pending the outcome of the hearing on consideration of the PSA/Lock-Up, sustain its objection to the use of cash collateral to fund professional fees and expenses without Midlands consent and grant Midland such other and further relief to which it might show itself justly entitled. Dated: August 5, 2010 New York, New York
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HAYNES AND BOONE, LLP
/s/ Lenard M. Parkins Lenard M. Parkins (NY Bar #4579124) Mark Elmore (admitted pro hac vice) 1221 Avenue of the Americas, 26th Floor New York, NY 10020-1007 Telephone No.: (212) 659-7300 Facsimile No.: (212) 884-8211 - and John D. Penn, Esq. (NY Bar #4847208 and admitted pro hac vice) Haynes and Boone, LLP 201 Main Street, Suite 2200 Fort Worth, Texas 76102 Telephone No.: (817) 347-6610 Facsimile No.: (817) 348-2300
ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.
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HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, NY 10020 Telephone: (212)

assist the Debtors in the development, preparation, and distribution of

If so, how can this ever be sanctioned by a court?

HAYNES AND BOONE, LLP

ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.

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