James H.M. Sprayregen, P.C. Paul M. Basta Stephen E. Hessler Brian S.

Lennon KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DEBTORS OBJECTION TO BEST WESTERN INTERNATIONAL, INC.S MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM PURSUANT TO 11 U.S.C. 5031

The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.

Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors) submit the following objection (the Objection) to the Motion of Best Western International, Inc. for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. 503 [Docket No. 1198] (the Best Western Motion). Introduction The Court should deny Best Western International, Inc.s (Best Western) motion for allowance of an administrative expense claim. On January 26, 2011, the Court entered an order authorizing the Debtors to reject the Best Western Membership Agreement, effective as of February 13, 2011, thus terminating on that date the Debtors membership with Best Western, and discontinuing all use by the Debtors of Best Westerns name, mark, and other services. Best Western now seeks administrative priority for $85,352.21 related to claims arising under the Best Western Membership Agreement. Of that amount, approximately $12,000 represents prepetition claims that plainly are not entitled to administrative priority. The balance, other than

approximately $500, represents claims arising after the rejection and termination of the Best Western Membership Agreement. These claims should be treated as general unsecured rejection damages claims. Best Western has not (and cannot) show any benefit to the Debtors estates on account of Best Westerns incurrence of these claims and, therefore, Best Western has failed to provide any justification for its asserted elevation of priority. respectfully request that the Court deny the Best Western Motion. Objection I. The Best Western Motion is Without Legal and Factual Support Because the Claims Best Western Seeks to Elevate to Administrative Priority are Either Prepetition Claims or Claims that Cannot Otherwise Meet the Section 503(b) Standard. Section 503(b)(1)(A) of the Bankruptcy Code provides special priority for actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commission Accordingly, the Debtors

for services rendered after the commencement of the case. This priority is meant to facilitate a debtors reorganization efforts and encourage third parties that otherwise may be reluctant to transact business with the debtor. Amalgamated Ins. Fund v. McFarlins Inc., 789 F.2d 98, 101 (2d Cir. 1986). The burden, however, is upon the claimant to establish an entitlement to an administrative priority, and courts carefully scrutinize requests for administrative expenses to prevent certain creditors from receiving an unfair advantage over other similarly situated creditors. See id.; In re Chateaugay Corp., 102 B.R. 335, 35354 (Bankr. S.D.N.Y. 1989). To that end, the focal point for determining the allowance of priority is to prevent unjust enrichment of the estate, not to compensate the creditor for its purported loss. In re R.H. Macy & Co., Inc., 170 B.R. 69, 78 (Bankr. S.D.N.Y. 1994). Courts have established a two-part test to determine whether a claimant is entitled to administrative expense priority for providing postpetition goods and services to a debtor. A claim may be afforded administrative status: (1) if it arises out of a transaction between the creditor and the bankrupts trustee or debtor-in-possession; and (2) only to the extent the consideration supporting the claimants right to payment was both supplied to and beneficial to the debtor in possession in the operation of the business (the Administrative Priority Test). Amalgamated Ins. Fund, 789 F.2d at 101. Best Westerns claims can be broken down into three categories: (1) claims arising prepetition; (2) claims arising post-rejection and termination of the Best Western Membership Agreement; and (3) claims arising during the operation of the hotel under the Best Western Membership Agreement. This Objection applies the Administrative Priority Test to each

category in turn, ultimately resulting in approximately $500 being eligible for administrative

priority. As of the filing of this Objection, the Debtors have paid Best Western the eligible $500 of administrative expense claims. i. Best Westerns Prepetition Claims are Not Entitled to Administrative Priority Because the Claims Fail the First Part of the Administrative Priority Test.

Of the approximately $85,000 Best Western asserts should receive administrative priority, approximately $12,000 represents claims that arose prior to the filing the Debtors chapter 11 cases. As such, these claims did not arise out of a transaction between Best Western and the Debtors as debtors in possession and, therefore, per se fail the first part of the Administrative Priority Test. priority. Accordingly, these claims are not entitled to administrative

See In re Balport Const. Co., Inc., 123 B.R. 174, 179 (Bankr. S.D.N.Y. 1991)

([S]ection 503(b), in general, focuses exclusively on the post-petition aspect of the case, so that prepetition expenses are excluded.) (citing In re Jartran, Inc., 732 F.2d 584 (7th Cir.1984)). ii. Best Westerns Claims Arising Post-Rejection and Termination of the Best Western Membership Agreement are Not Entitled to Administrative Priority Because the Claims Did Not Benefit the Debtors Estates, and, Therefore Fail the Second Part of the Administrative Priority Test.

The balance of the claims for which Best Western seeks administrative priority (other than approximately $500), arise from the time period after the Debtors rejected and terminated the Best Western Membership Agreement pursuant to Court order. Best Western asserts that such claims should be granted administrative priority because, among other things, the Debtors utilized the Best Western name and mark during the operation of the hotel and the Best Western Membership Agreement was necessary to ensure the continuation of the Debtors debtor-in-possession financing provided by Solar Finance, Inc. (the Solar DIP). Since the Debtors rejection and termination of the Best Western Membership Agreement, however, the

Debtors have not operated the hotel using the Best Western name or mark.2 Further, the Debtors coordinated with Solar Finance, Inc. and secured its waiver and consent such that the termination of the Best Western Membership Agreement would not cause a default under the Solar DIP. Accordingly, Best Western has failed to offer sufficient justification to elevate its post-rejection claims to administrative priority because it cannot show how the incurrence of such claims has benefited the Debtors estates. When a debtor rejects an executory contract such as the Best Western Membership Agreement, the rejection creates a breach of the contract deemed to occur immediately before the petition date, thereby giving rise to a general unsecured claim for rejection damages, one not entitled to administrative priority. See 11 U.S.C. 365(g)(1), 502(g); NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984); In re Spectrum Info. Techs., Inc., 190 B.R. 741, 746 (Bankr. E.D.N.Y. 1996) (rejection of executory contract gives rise to unsecured claim for damages rather than administrative expense priority); In re Child World, Inc., 161 B.R. 349, 351 (Bankr. S.D.N.Y. 1993) (sublessees claim for damages resulting from rejection of subleases was entitled only to general unsecured status, rather than administrative priority status, where bankruptcy court had authorized debtor to reject both prime and sublease). There are certain circumstances (none applicable here), however, where a nondebtor counterparty may be entitled to
2

Best Western cannot assert that the Debtors renewal of the Best Western Membership Agreement in November 2010 constituted an assumption of such agreement thereby giving rise to administrative claims resulting from a subsequent rejection. The postpetition renewal of a prepetition agreement on the same terms and conditions as the original agreement does not cause the contract to be assumed. See In re Country Club Estates at Aventura Maint. Assn, 227 B.R. 565, 568 (Bankr. S.D. Fla. 1998) (holding that the postpetition renewal of a prepetition contract on the same terms as the original contract remained an executory contract that the debtor could assume or reject); see also Ray Larson Assocs. v. Nikko Am., Inc., 1996 WL 442799 at *5 (S.D.N.Y. 1996) (renewals do not constitute the formation of new contracts.); see also Trans-Orient Marine Corp. v. Star Trading & Marine, Inc., 925 F.2d 566, 570 (2d. Cir. 1991) (Renewal normally involves a continuation of the relationship on essentially the same terms and conditions as the original contract.). The Debtors renewed the Best Western Membership Agreement on exactly the same terms as the original agreement. The Debtors, therefore, retained their ability to reject the agreement as of the petition date, which they did on February 13, 2011.

administrative priority. For example, where a debtor induces a nondebtor to perform under an unassumed executory contract pending its decision to reject or assume, the nondebtor party may be entitled to administrative priority. Even in such an instance, however, section 503(b) of the Bankruptcy Code limits the valuation of the administrative expense to the extent the consideration supporting the claim was an actual and necessary cost of preserving the debtors estate. See Bildisco, 465 U.S. at 531; In re FBI Distribution Corp., 330 F.3d 36, 43 (1st Cir. 2003). Best Western has failed to meet its burden under section 503(b) of the Bankruptcy Code for allowance of administrative priority for all but a nominal amount of claims. Although the Debtors operated the hotel under the Best Western Membership Agreement prior to rejection, the Debtors were merely taking advantage of the opportunity afforded to debtors to evaluate their executory contracts and determine which of those agreements maximize the value of their estates. 11 U.S.C. 365(d)(2); Bethlehem Steel Corp. v. BP Energy Co. (In re Bethlehem Steel Corp.), 291 B.R. 260, 264 (Bankr. S.D.N.Y. 2003). Best Western has been compensated for any claims incurred as a result of operating the hotel during this time. The majority of claims for which Best Western now seeks administrative priority are simply contract default claims that provide no ongoing benefit to the Debtors estates. As discussed above, the Debtors did not use the Best Western name or mark post-rejection and the continuance of the Best Western Membership Agreement was no longer necessary to prevent a default under the Solar DIP. Because Best Western has failed to show that its post-rejection claims are actual or necessary costs of preserving the Debtors estates, these claims fail the Administrative Priority Test and are not entitled to administrative priority.

Conclusion For the foregoing reasons, the Debtors respectfully request the Court deny the Best Western Motion. New York, New York Dated: June 2, 2011 /s/ Brian S. Lennon James H.M. Sprayregen, P.C. Paul M. Basta Stephen E. Hessler Brian S. Lennon KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession