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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT of NEW YORK, 1 ) Case No. 10-13800 (SCC) ) Debtors. The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtor's federal tax identification number can be found at www.omnimgt.com / innkeepers.
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT of NEW YORK, 1 ) Case No. 10-13800 (SCC) ) Debtors. The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtor's federal tax identification number can be found at www.omnimgt.com / innkeepers.
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT of NEW YORK, 1 ) Case No. 10-13800 (SCC) ) Debtors. The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtor's federal tax identification number can be found at www.omnimgt.com / innkeepers.
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Confirmation Hearing Date and Time: June 23, 2011 at 2:00 p.m.
(prevailing Eastern Time)
K&E 19103759 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) In re: ) Chapter 11 ) INNKEEPERS USA TRUST, et al., 1 ) Case No. 10-13800 (SCC) ) Debtors. ) Jointly Administered )
DEBTORS MEMORANDUM OF LAW (A) IN SUPPORT OF CONFIRMATION OF DEBTORS CHAPTER 11 PLANS OF REORGANIZATION AND (B) IN RESPONSE TO OBJECTIONS THERETO
James H.M. Sprayregen, P.C. Anup Sathy, P.C. Paul M. Basta KIRKLAND & ELLIS LLP Stephen E. Hessler Brian S. Lennon 300 N. LaSalle Chicago, Illinois 60654 KIRKLAND & ELLIS LLP Telephone: (312) 862-2000 601 Lexington Avenue Facsimile: (312) 862-2200 New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900
Counsel for the Debtors and Debtors in Possession
Dated: June 23, 2011
1 The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.
i K&E 19103759 Table of Contents Page Table of Authorities ....................................................................................................................... vi Preliminary Statement ......................................................................................................................1 Background ......................................................................................................................................9 I. Company Overview, Corporate History, and Capital Structure. .......................................10 A. The Innkeepers Acquisition. ..................................................................................10 B. Innkeepers Post-Acquisition Performance. ..........................................................11 C. Innkeepers Capital Structure. ...............................................................................12 II. Prepetition Restructuring Efforts and Transition Into Chapter 11. ....................................13 A. Innkeepers Navigates the Global Economic Crisis. ...............................................13 B. Innkeepers Engages Marriott in Negotiations. .......................................................15 C. Innkeepers Explores a Restructuring Transaction Sponsored by Lehman. ...........16 D. Apollo Supports Innkeepers Restructuring Efforts. .............................................17 E. Negotiations with Marriott, Lehman, and Other Parties, and the Resulting Series of Interrelated Agreements. .........................................................................17 1. Marriott Adequate Assurance Agreement. ................................................18 2. Plan Support Agreement. ...........................................................................18 3. DIP Financing Agreements. .......................................................................19 4. The Cash Collateral Order and Cash Management Order. ........................19 III. The Chapter 11 Cases. .......................................................................................................20 A. The Debtors Robust Marketing and Sale Process. ...............................................21 B. The Auction and Plan Process. ..............................................................................24 1. The Fixed/Floating Auction. ......................................................................25
ii K&E 19103759 2. The LNR Properties Auction. ....................................................................25 C. Financing for the Successful Bids. .........................................................................26 D. Claims Objections. .................................................................................................27 E. The Disclosure Statement and Plan. ......................................................................28 IV. Operations During the Chapter 11 Cases. ..........................................................................29 A. Substantial Compliance with PIP Obligations. ......................................................30 B. Compliance with the Cash Collateral Order. .........................................................30 C. Compliance with the DIP Financings. ...................................................................31 D. Postpetition Operating Outperformance. ...............................................................31 V. Voting Overview. ...............................................................................................................32 Argument .......................................................................................................................................35 I. The Debtors Satisfy Each Requirement for Confirmation by a Preponderance of the Evidence. ......................................................................................................................35 A. The Plan Complies with Section 1129(a)(1) of the Bankruptcy Code. .................35 1. The Plan Satisfies the Classification Requirements of Section 1122............................................................................................................36 2. The Plan Satisfies the Mandatory Requirements of Section 1123(a). ......................................................................................................43 B. The Debtors Have Complied with the Applicable Provisions of the Bankruptcy Code (Section 1129(a)(2)). .................................................................45 1. The Debtors Have Complied with the Disclosure and Solicitation Requirements of Section 1125. ..................................................................46 2. The Debtors Have Satisfied the Plan Acceptance Requirements of Section 1126...............................................................................................48 C. The Plan Has Been Proposed in Good Faith and Not by Any Means Forbidden by Law (Section 1129(a)(3)). ...............................................................50 D. The Plan Provides for Bankruptcy Court Approval of Certain Administrative Payments (Section 1129(a)(4)). ....................................................51
iii K&E 19103759 E. Post-Emergence Directors and Officers Will Be Disclosed Before the Effective Date and Their Appointment Is Consistent with Public Policy (Section 1129(a)(5)). ..............................................................................................52 F. The Plan Does Not Require Governmental Approval of Rate Changes (Section 1129(a)(6)). ..............................................................................................53 G. The Plan Is in the Best Interests of Creditors and Interest Holders (Section 1129(a)(7)). ..............................................................................................53 H. The Plan Has Been Accepted By Multiple Impaired Classes (Section 1129(a)(8)). ..............................................................................................57 I. The Plan Complies with Statutorily Mandated Treatment of Administrative and Priority Tax Claims (Section 1129(a)(9)). .............................58 J. At Least One Impaired Class of Claims Has Accepted the Plan, Excluding the Acceptances of Insiders (Section 1129(a)(10)). ...............................................60 K. The Plan Is Feasible (Section 1129(a)(11)). ..........................................................65 L. The Plan Provides for Payment of All Fees Under 28 U.S.C. 1930 (Section 1129(a)(12)). ............................................................................................67 M. The Plan Provides for Payment of Retiree Benefits (Section 1129(a)(13)). ..........67 N. The Plan Satisfies the Cramdown Requirements of Section 1129(b) of the Bankruptcy Code. .............................................................................................67 1. The Plan Does Not Unfairly Discriminate With Respect to Impaired Classes. .......................................................................................68 2. The Plan Is Fair and Equitable With Respect to Impaired Classes. ...........70 O. The Principal Purpose of the Plan Is Not Avoidance of Taxes or Section 5 of the Securities Act (Section 1129(d)). ................................................................71 II. The Discretionary Contents of the Plan Are Appropriate and Should Be Approved............................................................................................................................72 A. The Plans Settlement of Claims and Controversies Is Fair and Equitable and Should be Approved. .......................................................................................72 B. The Plans Release Provisions Are Appropriate and Should Be Approved. .........73
iv K&E 19103759 1. The Debtor Releases Are in the Best Interests of the Debtors Estates and Are a Sound Exercise of the Debtors Business Judgment. ...................................................................................................75 a. Trade Preference Claims. ...............................................................76 b. Insider Preference Claims. .............................................................78 c. LBO Claims. ..................................................................................79 2. The Third Party Releases Are Fair, Equitable, and Reasonable, and Are in the Best Interests of the Debtors and All Holders of Claims. .........81 a. The Debtors Estates Have Received Substantial Contributions from the Releasing Parties. .....................................83 b. The Third Party Releases Enjoin Claims that Would Indirectly Impact the Debtors Reorganization Through Indemnity Obligations. ..................................................................85 c. The Third Party Releases Are Effectively Consensual. .................86 i. Members of the Ad Hoc Committee ..................................87 ii. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Voted in Favor of the Plan ..........................88 iii. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Did Not Vote ...............................................88 iv. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Voted Against the Plan. ..............................94 3. The Objection to the Third Party Releases Should Be Overruled. ............94 C. The Plans Exculpation and Injunction Provisions Are Appropriate and Should Be Approved. .............................................................................................98 1. The Exculpation Provision Should Be Approved. .....................................98 2. The Injunction Provision Is Appropriately Tailored to Implement the Plan.....................................................................................................102
v K&E 19103759 D. The Employee Emergence Payments Are Appropriate and Should Be Approved..............................................................................................................103 E. The Ad Hoc Committee Agreement is Appropriate and Should Be Approved in Its Entirety. ......................................................................................108 1. The Ad Hoc Committee Members Have Been Active Participants In These Chapter 11 Cases Since the Petition Date and Have Distinguished Themselves from Other Holders of Innkeepers USA Trust Preferred C Interests. ......................................................................109 2. Ample Authority Exists Under the Bankruptcy Code and Applicable Case Law for the Ad Hoc Committee Payment. ...................114 a. Section 1129(a)(4) Authorizes Payments Under Chapter 11 Plans. ............................................................................................115 b. Allowance and Payment of the Ad Hoc Committee Payment Is Appropriate Under the Section 503(b) Standards Given the Substantial and Unique Benefits Provided to the Debtors by the Ad Hoc Committee. ...................116 c. Allowance and Payment of the Ad Hoc Committee Payment Is Appropriate Under Section 363(b) as a Sound Exercise of the Debtors Business Judgment. ..............................119 d. Payment of the Ad Hoc Committee Payment is Appropriate Under Section 1123(b)(3)(A) or Bankruptcy Rule 9019 to the Extent the Bankruptcy Court Determines That They Apply............................................................................................123 e. The Unique Facts and Circumstances of the Chapter 11 Cases Constitute Appropriate Grounds for the Court to Exercise its Equitable Powers Under Section 105(a) and Authorize Allowance and Payment of the Ad Hoc Committee Payment. ....................................................................125 3. Additional Arguments Raised in the Objections Regarding the Ad Hoc Payment Are Without Merit. ............................................................126 F. The Debtors Purchase of D&O Tail Insurance Is Appropriate and Should Be Approved. .......................................................................................................127 Conclusion ...................................................................................................................................128
vi K&E 19103759 Table of Authorities Page Cases Aetna Cas. and Sur. Co. v. Clerk, U.S. Bankr. Ct., New York, N.Y. (In re Chateaugay Corp.), 89 F.3d 942 (2d Cir. 1996)................................................................................................ 36 Air Line Pilots Assoc. Intl v. Am. Natl Bank and Trust Co. of Chicago (In re Ionosphere Clubs, Inc.), 156 B.R. 414 (S.D.N.Y. 1993), affd, 17 F.3d 600 (2d Cir. 1994) ..................... 72, 73, 124 Amalgamated Ins. Fund v. McFarlins Inc., 789 F.2d 98 (2d Cir. 1986).............................................................................................. 118 Bank of Am. Natl Trust & Sav. Assn v. 203 N. LaSalle St. Pship, 526 U.S. 434 (1999) .......................................................................................................... 50 Boston Post Rd. L.P. v. FDIC (In re Boston Post Rd, L.P.), 21 F.3d 477 (2d Cir. 1994).......................................................................................... 36, 68 Canfield v. Van Atta Buick/GMC Truck, Inc., 127 F.3d 248 (2d Cir. 1997).............................................................................................. 90 Captran Creditors Trust v. McConnell (In re Captran Creditors Trust), 128 B.R. 469 (M.D. Fla. 1991) ......................................................................................... 99 Comm. of Asbestos-Related Litigants and/or Creditors v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612 (Bankr. S.D.N.Y. 1986) .............................................................................. 120 Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983).......................................................................................... 119 Cosoff v. Fodman (In re W.T. Grant Co.), 699 F.2d 599 (2d Cir. 1983), cert. denied, 464 U.S. 822 (1983) ................................ 72, 73 Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005)....................................................................................... passim Enron Corp. v. New Power Co., 438 F.3d 1113 (11th Cir. 2006) .................................................................................. 47, 48
vii K&E 19103759 Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d Cir. 1993)................................................................................................ 36 Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters., Ltd., II (In re Briscoe Enters., Ltd. II), 994 F.2d 1160 (5th Cir. 1993) .......................................................................................... 35 In re 500 Fifth Ave. Assocs., 148 B.R. 1010 (Bankr. S.D.N.Y. 1993) ............................................................................ 36 In re Adelphia Bus. Solutions, Inc., 341 B.R. 415 (Bankr. S.D.N.Y. 2003) .............................................................................. 65 In re Adelphia Commcns Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007) .............................................................................. 54 In re AppliedTheory Corp., Case No. 02-11868, 2008 WL 1869770 (Bankr. S.D.N.Y. Apr. 24, 2008) ...................... 73 In re Aztec Co., 107 B.R. 585 (Bankr. M.D. Tenn. 1989) .......................................................................... 68 In re Bally Total Fitness of Greater N.Y., Inc., No. 07-12395, 2007 WL 2779438 (Bankr. S.D.N.Y. Sept. 17, 2007) ....................... passim In re Bayou Group, LLC, 431 B.R. 549 (Bankr. S.D.N.Y. 2010) ............................................................................ 117 In re Buttonwood Partners, Ltd., 111 B.R. 57 (Bankr. S.D.N.Y. 1990) ................................................................................ 69 In re Calpine Corp., Case No. 05-60200 (Bankr. S.D.N.Y. Dec. 19, 2007) ............................................... passim In re Cellular Info. Sys., Inc., 171 B.R. 926 (Bankr. S.D.N.Y. 1994) .............................................................................. 47 In re Charter Commcns, Inc., Case No. 09-11435 (Bankr. S.D.N.Y. Nov. 17, 2009) ............................................. 94, 101 In re Citadel Broad. Corp., Case No. 09-17442 (Bankr. S.D.N.Y. May 19, 2010) .................................................... 101 In re Dana Corp., 390 B.R. 100 (Bankr. S.D.N.Y. 2008) ............................................................................ 117
viii K&E 19103759 In re DBSD N. Am., Inc., 419 B.R. 179 (Bankr. S.D.N.Y. 2009) ...................................................................... 72, 101 In re DJK Residential LLC, No. 08-10375 (Bankr. S.D.N.Y. May 7, 2008) ................................................. 76, 100, 102 In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723 (Bankr. S.D.N.Y. 1992) ................................................................ 36, 51, 102 In re Enron Corp., Case No. 02-8489, 2003 WL 230838 (S.D.N.Y. Jan. 31, 2003) ...................................... 73 In re Enron, No. 01-16034 (Bankr. S.D.N.Y. July 15, 2004) ................................................... 61, 62, 63 In re Gen. Growth Props., Case No. 09-11977 (ALG) (Bankr. S.D.N.Y., Feb. 7, 2011) ......................................... 113 In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D. Del. 2001) ................................................................................. 62 In re Global Crossing Ltd., 295 B.R. 726 (Bankr. S.D.N.Y. 2003) ............................................................................ 120 In re Granite Broad. Corp., 369 B.R. 120 (Bankr. S.D.N.Y. 2007) .............................................................................. 50 In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660, 672 (Bankr. D.D.C. 1992) ....................................................................... 127 In re Homestead Partners, Ltd., 197 B.R. 706 (Bankr. N.D. Ga. 1996) ............................................................................ 100 In re Integrated Res., 147 B.R. 650 (S.D.N.Y. 1992) ........................................................................................ 120 In re ION Media Networks, Inc., Case No. 09-13125 (Bankr. S.D.N.Y. Dec. 2, 2009) ................................................ 94, 101 In re Ionosphere Clubs, Inc., 156 B.R. 414 (S.D.N.Y. 1993) ........................................................................................ 124 In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) ................................................................................ 36
ix K&E 19103759 In re Jartran, Inc., 44 B.R. 331 (Bankr. N.D. Ill. 1984) ............................................................................... 100 In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986) .................................................................... 45, 68, 69 In re Johns-Manville Corp., 78 B.R. 407 (S.D.N.Y. 1987) ............................................................................................ 45 In re Journal Register Co., 407 B.R. 520 (Bankr. S.D.N.Y. 2009) .................................................................... 104, 115 In re Leslie Fay Cos., 207 B.R. 764 (Bankr. S.D.N.Y. 1997) .............................................................................. 66 In re Mirant Corp., Case No. 03-46590 (DML) (Bankr. N.D. Tex. Nov. 17, 2006) ...................................... 114 In re Movie Gallery, Case No. 07-33849 (Bankr. E.D. Va. Apr. 10, 2008) ....................................................... 76 In re Neff Corp., Case No. 10-12610 (Bankr. S.D.N.Y. Sept. 21, 2010) ............................................. 76, 101 In re Nirvana Rest., Inc., 337 B.R. 495 (S.D.N.Y. Bankr. 2006) .............................................................................. 79 In re One Times Square Assocs. Ltd. P'ship, 159 B.R. 695 (Bankr. S.D.N.Y. 1993) .............................................................................. 65 In re Oneida Ltd., 351 B.R. 79 (Bankr. S.D.N.Y. 2006) ................................................................ 76, 100, 101 In re Pappas, 277 B.R. 171 (Bankr. E.D.N.Y. 2002) ............................................................................ 116 In re Pilgrims Pride Corp., Case No. 08-45664 (DML) (Bankr. N.D. Tex. Oct. 27, 2009) ....................................... 114 In re Prudential Energy Co., 58 B.R. 857 (Bankr. S.D.N.Y. 1986) .......................................................................... 65, 66 In re Pub. Serv. Co. of New Hampshire, 88 B.R. 521 (Bankr. D.N.H. 1988) ................................................................................. 100
x K&E 19103759 In re Purofied Down Prods. Corp., 150 B.R. 519 (S.D.N.Y. 1993) .................................................................................... 72, 73 In re Resorts Intl Inc., 145 B.R. 412 (Bankr. D. N.J. 1990) ................................................................................. 62 In re Ridgewood Sacramento, Inc., 20 B.R. 443 (Bankr. E.D. Cal. 1982) .............................................................................. 116 In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999).............................................................................................. 50 In re Source Enters., Inc., No. 06-11707, 2007 WL 2903954 (Bankr. S.D.N.Y. Oct. 1, 2007) ......................... 50, 100 In re Spiegel, Inc., Case No. 03-11540, 2005 WL 1278094 (Bankr. S.D.N.Y. May 25, 2005) ...................... 75 In re Stations Casinos, Inc., 2010 WL 6564147, at *28-29 (Bankr. D. Nev. Aug. 27, 2010) ....................................... 63 In re Teligent, Inc., 282 B.R. 765 (Bankr. S.D.N.Y. 2002) .............................................................................. 90 In re Texaco Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988), appeal dismissed, 92 B.R. 38 (S.D.N.Y. 1988) .......................................................................................................... 65, 66 In re The Readers Digest Assn, Case No. 09-23529 (Bankr. S.D.N.Y. Jan. 19, 2010) ..................................................... 101 In re Tower Auto., Inc., Case No. 05-10578 (Bankr. S.D.N.Y. July 9, 2007) ......................................................... 76 In re Toy & Sports Warehouse, Inc., 37 B.R. 141 (Bankr. S.D.N.Y. 1984) ................................................................................ 45 In re Tronox, Inc., Case No. 09-10156 (Bankr. S.D.N.Y. Nov. 30, 2010) ..................................................... 94 In re U.S. Lines, Inc., 103 B.R. 427 (Bankr. S.D.N.Y. 1989) ............................................................................ 117 In re Winn-Dixie Stores, Inc., 356 B.R. 239 (Bankr. M.D. Fla. 2006) ........................................................................... 100
xi K&E 19103759 In re WorldCom, 2003 WL 23861928 (Bankr. S.D.N.Y. Oct. 31, 2003) ......................................... 51, 66, 69 In re Young Broad. Inc., 430 B.R. 99 (Bankr. S.D.N.Y. 2010) ................................................................................ 35 In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del. 1999) ........................................................................... 68, 100 JPMorgan Chase Bank, N.A. v. Charter Commcns Operating, LLC (In re Charter Commcns), 419 B.R. 221 (Bankr. S.D.N.Y. 2009) .................................................................. 35, 61, 63 Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988).................................................................................. 35, 50, 65 Koelbl v. Glessing (In re Koelbl), 751 F.2d 137 (2d Cir. 1984).............................................................................................. 50 Mabey v. Southwestern Elec. Power Co. (In re Cajun Elec. Power Coop., Inc.), 150 F.3d 503 (5th Cir. 1998), cert. denied, 526 U.S. 1144 (1999) ................................. 104 Momentum Mfg. Corp. v. Emp. Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132 (2d Cir. 1994).............................................................................................. 46 Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)............................................................................................ 124 Newman v. Stein, 464 F.2d 689 (2d Cir. 1972)........................................................................................ 72, 73 Official Comm. of Unsecured Creditors of LTV Aerospace and Defense Co. v. LTV Corp. (In re Chateaugay Corp.), 973 F.2d 141 (2d Cir. 1992)............................................................................................ 119 Official Comm. of Unsecured Creditors v. airway Indus., Inc. (In re Airway Indus., Inc.), 354 B.R. 82 (W.D. Pa. 2006) .......................................................................................... 105 Paramount Commcns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994) ................................................................................................. 120 Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. Pship, 507 U.S. 380 (1993) ........................................................................................................ 125
xii K&E 19103759 PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000)...................................................................................... 99, 101 Q Tech. Inc. v. Allard (In re Trans-Indus., Inc.), Case No. 08-14655, 2009 WL 1259991 (E.D. Mich. May 1, 2009)................................. 90 Resol. Trust Corp. v. Best Prods. Co., Inc., 177 B.R. 791 (S.D.N.Y. 1995) .......................................................................................... 48 Rosenberg v. XO Commcns, Inc. (In re XO Commc,ns, Inc.), 330 B.R. 394 (Bankr. S.D.N.Y. 2005) .............................................................................. 82 SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992)........................................................................................ 57, 82 Upstream Energy Servs. v. Enron Corp. (In re Enron Corp.), 326 B.R. 497 (S.D.N.Y. 2005) .................................................................................. 99, 100 Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 134 B.R. 499 (Bankr. S.D.N.Y. 1991) ............................................................................ 123 Statutes 11 U.S.C. 101(2) ............................................................................................................ 38, 40, 42 11 U.S.C. 105(a) ...................................................................................................... 114, 125, 126 11 U.S.C. 1103 ................................................................................................................... 99, 100 11 U.S.C. 1122 ............................................................................................................... 35, 36, 43 11 U.S.C. 1122(b) ...................................................................................................................... 59 11 U.S.C. 1123 ..................................................................................................................... 35, 36 11 U.S.C. 1123(a) ................................................................................................................ 43, 45 11 U.S.C. 1123(a)(1) .................................................................................................................. 43 11 U.S.C. 1123(a)(1)-(7) ............................................................................................................ 43 11 U.S.C. 1123(a)(2) .................................................................................................................. 43 11 U.S.C. 1123(a)(3) ............................................................................................................ 44, 50
K&E 19103759 Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, Innkeepers or the Debtors), submit this memorandum of law in support of confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1445] (as modified, amended, or supplemented from time to time, the Plan), 2 and in response to the objections received. 3 In support of confirmation, the Debtors respectfully state as follows: Preliminary Statement 1. Innkeepers stands on the doorstep of a successful and largely consensual conclusion to these Chapter 11 Cases. Confirmation of the Plan is the last step the Debtors must take before unlocking the door to the extraordinary value generated at the auctions conducted on May 2 and 3, 2011. The Plan is comprised of four joint chapter 11 plans. The key highlights of each of the Joint Plans are summarized in the following table:
2 Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. To the extent that this memorandum of law conflicts with the proposed form of Confirmation Order or the Plan, the Confirmation Order or the Plan, as applicable, shall control. 3 Objection of the United States Trustee to Debtors Plans of Reorganization [Docket No. 1456] (the U.S. Trustee Objection); Objection of Best Western International, Inc. to Debtors Plans of Reorganization [Docket No. 1486] (the Best Western Objection); Limited Objection and Reservation of Rights of LNR Partners, LLC, LNR Securities Holdings, LLC and the Trusts with Respect to the Debtors' Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1705] (the LNR Objection); Objection of Carrollton-Farmers Branch Independent School District to Confirmation of Debtors' Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1717] (the Carrollton-Farmers Objection); Objection by One East Capital Advisors L.P. to Confirmation of the Remaining Debtors Plan of Reorganization [Docket No. 1735] (the One East Objection); Lehman ALI Inc. and SASCO 2008-C2, LLCs (I) Limited Objection of to Confirmation of the Remaining Debtors Plan and (II) Reservation of Rights [Docket No. 1737] (the Lehman Objection); Objection of Midland Loan Services to Confirmation of the Fixed/Floating and Remaining Debtor Plans of Reorganization [Docket No. 1738] (the Midland Objection); and Objection of Certain Chartis Companies to Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1739] (the Chartis Objection and, together with the other objections, the Plan Objections). Prior to the Confirmation Hearing, the Debtors resolved informal objections from, among others, TriMont and C-III.
2 K&E 19103759 Plan Key Provisions Fixed/Floating Plan Debtor Innkeepers USA Limited Partnership will sell its equity interest in the Fixed/Floating Debtors to a joint venture between the private-equity firm Cerberus Capital Management, L.P. (Cerberus) and real estate investment trust Chatham Lodging Trust (Chatham Trust and, together with Cerberus, Cerberus/Chatham) for an aggregate amount of approximately $1.1 billion.
Midland Loan Services, a division of PNC Bank, N.A. (Midland), the special servicer for the $825.4 million Fixed Rate Pool Mortgage Loan, has agreed to a loan modification that, among other things, reduces the principal amount owing on account of that loan to approximately $723.4 million.
Lehman ALI Inc. (Lehman), the lender under the Debtors $250 million Floating Rate Pool Mortgage Loan, will receive the entire amount of the principal owing under the Floating Rate Pool Mortgage Loan and accrued interest.
Unsecured creditors will receive substantial recoveries from a fund of $4.75 million that has been set aside for their claims. Ontario Plan The Debtors will turn over the hotel securing the $35 million Ontario Hotel Mortgage Loan to C-III, the special servicer for that loan.
Unsecured creditors will share in a fund of $30,000 that has been set aside by C-III to satisfy their claims. Anaheim Plan Provided that Lehman, the lender under the Anaheim Hotel Mortgage Loan, completes its due diligence by July 5, 2011, the Debtors will turn over to Lehman the hotel securing the $13.7 million Anaheim Hotel Mortgage Loan pursuant to the terms of the Anaheim Commitment Letter. Within six months of the Effective Date, CWCapital, the special servicer for the Anaheim Hotel Mortgage Loan, shall receive payment in full of all amounts due and owing.
If Lehman is unable to complete its diligence by July 5, 2011, the property will be sold for cash pursuant to section 363 of the Bankruptcy Code.
Unsecured creditors in the Anaheim Debtors will be paid in full.
3 K&E 19103759 Plan Key Provisions Remaining Debtor Plan The Remaining Debtors will sell the five properties that serve as collateral for mortgage loan trusts serviced by LNR to Chatham L.P. for a total purchase price of $195 million.
LNR has agreed to the modification of each of the loans secured by the LNR Properties and the assignment of those loans to Chatham L.P.
Unsecured creditors and holders of equity interests in the Remaining Debtors will receive recoveries pursuant to a Distribution Waterfall.
The Ad Hoc Committee will receive a payment of $3.5 million.
2. The Plan enjoys near unanimous support throughout the Debtors capital structure. Midland and LNR have agreed to loan modifications that facilitate the Fixed/Floating Plan and the Chatham Hotel Sale Transaction. Lehman will receive payment in the full principal amount of the Floating Rate Pool Mortgage Loan. SASCO will even receive a recovery under the Fixed/Floating Plana result that seemed unlikely just months ago. The official committee of unsecured creditors (the Creditors Committee) supports the Plan. The Debtors were able to resolve the Ad Hoc Committees objections to the Plan at the time of the Disclosure Statement filing by entering into the Ad Hoc Committee Agreement. And, most notably, holders of claims and interests entitled to vote on the Plan have voted overwhelmingly in favor the Plan. In fact, 18 of the 19 voting classes for which votes were received voted nearly unanimously in favor of the Joint Plans. Of the 994 valid ballots received across all of the Debtors plans, 959 voted to accept. 4
3. The Debtors received nine objections to confirmation of the Plan. As of the filing of this memorandum, four objections have been resolved in full, one has been partially resolved, and four have not been resolved, though negotiations continue. The Debtors have been working
4 This calculation does not include ballots returned by holders of Class R8 Innkeepers USA Trust Preferred C Interests because such votes are denominated in shares.
4 K&E 19103759 hard (and continue to do so) to resolve all outstanding objections to maximize support for the Plan. The following is a summary of the status of these negotiations. Resolved Objections The Debtors resolved the objection of the United States Trustee for the Southern District of New Yorks (the U.S. Trustee) by agreeing that the Rejecting Series C Holders (as defined herein) would not provide a release to, or receive a release from, Apollo. The objection of York Credit Opportunities Fund, L.P. and York Credit Opportunities Master Fund, L.P. (York) has been withdrawn [Docket No. 1762]. Best Western International, Inc.s (Best Western) objection has been resolved. The Debtors submitted a stipulation between Best Western and the Debtors that, subject to Bankruptcy Court approval, deems Best Westerns Plan objection withdrawn, expunges Best Westerns proof of claim, and provides Best Western an administrative expense claim. Carrollton-Farmers Branch Independent School Districts (Carrollton- Famers) objection has been resolved by adding language to the Confirmation Order (as defined herein). Partially-Resolved Objections Lehmans objection has been resolved in part, with respect to the employee payment. Lehmans objection to the Ad Hoc Committee Payment (as defined herein) remains pending. Outstanding Objections Midlands objection has not yet been resolved. The Debtors have accepted modifications to the Plan and the form of proposed Confirmation Order that the Debtors expect will resolve a number of Midlands concerns. Midlands objection to the Ad Hoc Committee Payment remains pending. One East Capital Advisors L.P.s (One East) objection has not been resolved. Insurer Chartiss objection has not been resolved. LNRs objection has not been resolved.
5 K&E 19103759 4. While the Debtors are continuing to attempt to resolve the few remaining objections in advance of the confirmation hearing, in the event these efforts are not fully successful, any outstanding objections should be overruled. 5. Lehman and Midlandthe Debtors two largest secured creditors that stand to recover more than $1 billion in value under the Fixed/Floating Planvoted to reject the Remaining Debtor Plan. 5 As an initial matter, Midlands and Lehmans votes to reject the Plan defy logic. The Remaining Debtor Plan contemplates nothing more than the following: holders of allowed claims and interests against Grand Prix Holdings will receive a Waterfall Distribution of the proceeds that flow up to Grand Prix Holdings on account of its Innkeepers USA Trust Preferred A Interests in Debtor Innkeepers USA Trust. 6 Put simply, Midland and Lehman rejected a pot plan for a transaction they support. 6. Midlands and Lehmans motive in rejecting the Remaining Debtor Plan is obviousMidland and Lehman desperately want whatever leverage they think they can attain in the, by now, well-known dispute regarding Midlands and Lehmans guaranty claims against Grand Prix Holdings. 7 This is the same dispute that resulted in days of delay before the hearing to approve the Debtors Disclosure Statement. At that time, the Debtors agreed to remove all references to Midlands and Lehmans guaranty claims from the Fixed/Floating Plan and the
5 Midlands and Lehmans rights to vote on the Remaining Debtor Plan originate in the guarantees that Remaining Debtor Grand Prix Holdings provided on account of the Fixed Rate Mortgage Loan, the Floating Rate Mortgage Loan, and the Floating Rate Mezzanine Loan. 6 See Plan, Art. III.B.4. 7 Midland and Lehman may assert that they voted to reject solely to preserve their ability to object to the Remaining Debtor Plan. Such a strategy is demonstrably unnecessary, however, because the Voting Stipulation expressly preserved Midlands and Lehmans rights to object to the Plan. See Voting Stipulation 5 (The parties asserting the Guaranty Claims reserve all of . . . their rights to object to Confirmation of the Remaining Debtor Plan as it pertains in any way to Grand Prix Holdings.).
6 K&E 19103759 Remaining Debtor Plan and agreed that issues regarding those claims would be resolved as part of the Debtors claims reconciliation process and not as part of confirmation. 7. Despite this apparent agreement, Midland thereafter filed a motion seeking immediate allowance of its alleged guaranty claim. And just two weeks ago, Midland and Lehman agreed to the Stipulation Providing Certain Guaranty Claims Voting and Ballot Rights, dated June 7, 2011 [Docket No. 1639] (the Voting Stipulation), pursuant to which the Debtors, Midland, Lehman, and others further agreed to postpone litigation related to their alleged guaranty claims against Remaining Debtor Grand Prix Holdings until after confirmation. 8. Despite all of the Debtors efforts and the Courts clearly stated preference at the June 7, 2011 hearing for the guaranty claims not to be an obstacle at confirmation, the cloud surrounding the guaranty claims continues to hover. 8 What has not changed, however, is that the validity of the guaranty claims and the resolution of any disputes with respect thereto are not confirmation issues. It is undisputed that Lehmans and Midlands claims would be the last to be paid in the Debtors capital structure. Resolution of these claims are reconciliation issues that canand shouldbe dealt with at a later date, and logically when it becomes clear what distributable value will flow up to Grand Prix Holdings. By casting their guaranty claim votes to reject the Plan, however, Midland and Lehman have forced the issue, requiring the Debtors to prepare objections to the guaranty claims for imminent filing. 9. For unknown reasons, however, Midland and Lehman do not want the Debtors to review the issues surrounding the guaranty claims. Midland and Lehmans preferred resolution is simple yet unworkable: Let Midland and Lehman decide how the distributable value of Grand
8 See 6/7/11 Hrg Tr. at 12:25-13:5 (Im not going to hear anything at confirmation about [the guaranty claims at Grand Prix Holdings]. In other words, with respect to the issue of releases or anybody in any way linking or tying their views on the confirmability of the plan, the plans, because of this open issue. I dont want to be surprised in that regard.).
7 K&E 19103759 Prix Holdings should be split among themselves without regard for Grand Prix Holdings other stakeholders. As fiduciaries, the Debtors simply cannot let this happen, especially when there are valid disputes regarding the guaranty claims and other interested stakeholders. The Debtors are committed to resolving the guaranty disputes in a fair and equitable manner. To that end, just last week, the Debtors reached an agreement with C-III, pursuant to which the Debtors agreed to allow C-IIIs guaranty claim against Grand Prix Holdings on account of the Ontario Hotel Mortgage Loan, subject to a $1.5 million cap on distributions. 10. The Debtors respectfully submit that the Court should confirm all of the Plans, including the Remaining Debtor Plan. Midland and Lehmans attempt to erect obstacles to confirmation lacks basis in the applicable law and is economically senseless for themselves as well as for other potential recipients of value from Grand Prix Holdings. First, Midland and Lehman argue that they have a blocking position with respect to confirmation of the Remaining Debtor Plan because there is no impaired consenting class at Grand Prix Holdings. The Debtors disagree. Even though Midland and Lehman voted to reject the Grand Prix Holdings plan, there is ample authority that would support confirmation of the Remaining Debtor Plan because there are 10 impaired accepting classes within the Joint Plan for the Remaining Debtors. 11. Second, even if Midland and Lehman are found to have valid guaranty claims against Grand Prix Holdings and they prevail in their objection to the Remaining Debtor Plan, there is no upside. Given the circumstances of these Chapter 11 Cases, there are only two possible outcomesan orderly distribution of Grand Prix Holdings assets pursuant to a chapter 11 plan or a liquidation pursuant to chapter 7 of the Bankruptcy Code. The Remaining Debtor Plan provides for such an orderly distribution, minimizes costs and expenses associated with prolonging confirmation, and reduces the risk of disrupting the Chatham Hotel Sale Transaction.
8 K&E 19103759 The fact is that the value available to the creditors of Grand Prix Holdings is not going to increase. Midland and Lehman have not objected to the terms of the Chatham Hotel Sale Transaction. Accordingly, any delay or disruption in the Remaining Debtor Plan will only increase administrative costs and decrease distributable value. 12. Third, Midland and Lehman object to the Ad Hoc Committee Payment to the extent it exceeds the reimbursement of the approximately $2.2 million in legal fees (and which amount will increase) that the Ad Hoc Committee has incurred. The amount at issue is approximately $1.3 million. Notably, if this amount were not paid to the Ad Hoc Committee, only 40% of that $1.3 million would flow to Grand Prix Holdings. 9 Accordingly, Midland and Lehman, who already stand to receive more than one billion dollars of value in connection with the Fixed/Floating Plan, object to the Ad Hoc Committee Payment over an issue valued at approximately $520,000. The Debtors respectfully submit that the Ad Hoc Committee Payment is an appropriate and necessary payment. 13. The only remaining objection was filed by One Easta very tardy, dissident Preferred C Shareholder that thinks it should be entitled to participate in the Ad Hoc Committee Payment. As described in detail below, the Ad Hoc Committee Payment is on account of the Ad Hoc Committees active participation in these Chapter 11 Cases, not on account of their status as Preferred C Shareholders. In short, the Ad Hoc Committee has distinguished itself from other Preferred C Shareholders in countless ways. One East, however, has not distinguished itself in any meaningful way (at least not in any positive way). The Debtors were not even aware of One Easts existence until last week when One East filed its objection to confirmation on the basis that they will not participate in the Ad Hoc Committee Payment. The record is clear. One East
9 See footnote 266 herein for further detail regarding how 40% of the value is available to Grand Prix Holdings.
9 K&E 19103759 has not provided any value to the estates that would warrant any payment from the Debtors pursuant to the Remaining Debtor Plan. The Debtors respectfully submit that the Court should deny the One East objection. 14. The following pages demonstrate why the Plan should be confirmed. Each of the Joint Plans satisfies section 1129 of the Bankruptcy Code. Together with this memorandum of law, the Debtors are filing declarations from Marc A. Beilinson (the Debtors chief restructuring officer), Frederick J. Kleisner (a member of the Debtors board of trustees), William Q. Derrough (a Managing Director with Moelis & Company, LLC, the Debtors' financial advisor), Todd Brents (a Managing Director with AP Services, LLC, the Debtors crisis manager), and Brian Osborne (representing the Debtors Notice and Claims Agent). The Debtors respectfully submit that this evidence (along with any supplemental testimony provided at the hearing) provide the Court with the evidentiary bases it needs to confirm the Plan. Based on this evidence, the Debtors respectfully request that the Court confirm the Plan. Background 10
15. This Background section provides factual information about the Debtors that demonstrates why the Plan should be confirmed. Section I provides an overview of the Debtors business and capital structure. Section II summarizes the Debtors prepetition restructuring efforts. Section III summarizes the key events of these Chapter 11 Cases. Section IV highlights
10 Contemporaneously herewith, the Debtors have filed the Declaration of Marc A. Beilinson in Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Beilinson Declaration); the Declaration of William Q. Derrough in Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Derrough Declaration); the Declaration of Frederick J. Kleisner in Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Kleisner Declaration); the Declaration of Todd Brents in Support of Confirmation of the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Brents Declaration); and the Certification of Brian Osborne with Respect to the Tabulation of Votes on Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (the Voting Report).
10 K&E 19103759 the Debtors strong financial performance throughout these Chapter 11 Cases. Section V reports how creditors and interest holders have voted in overwhelming favor of the Plan. I. Company Overview, Corporate History, and Capital Structure. 11
16. Innkeepers is a self-administered Maryland REIT that indirectly owns and operates 71 hotels. As a general business practice, the Debtors seek to affiliate their hotels with premier franchise companies and brands that offer robust marketing support and services and that have demonstrated their ability to command revenue premiums over other brands. To that end, all but nine of the Innkeepers hotels operate under franchise agreements with Marriott International, Inc. (Marriott), Hilton International, Inc. (Hilton), Hyatt Hotels Corporation, and Starwoods Hotel & Resorts Worldwide, Inc. or their affiliates. Pursuant to the franchise agreements, Innkeepers is required to fund capital expenditures to maintain and improve in a manner that satisfies the respective franchisor. Certain of these franchise agreements also require Innkeepers to fund particular property improvement programs (PIPs). A. The Innkeepers Acquisition. 12
17. In June 2007, Apollo, through certain subsidiaries, acquired Innkeepers (the Acquisition), which was a publicly traded company whose shares were listed on the New York Stock Exchange. The Acquisition was funded with equity indirectly invested by Apollo, the assumption of certain secured debt outstanding prior to the Acquisition, and certain secured debt incurred at the time of the Acquisition. All of Innkeepers common shares outstanding at the time of the Acquisition were acquired for cash and then extinguished. Innkeepers $145 million 8% Series C cumulative preferred shares outstanding prior to the Acquisition remained outstanding after the Acquisition. In consideration for Apollos $250 million equity
11 See Beilinson Decl. 4. 12 See id. 5.
11 K&E 19103759 investment, Apollos subsidiary Grand Prix Holdings, a Debtor in these Chapter 11 Cases, was issued all (except for relatively small amounts currently held by management) of Innkeepers newly issued (a) common shares and (b) Innkeepers USA Trust Preferred A Interests. B. Innkeepers Post-Acquisition Performance. 13
18. As everyone knows, in 2008, the world changed. On September 15, 2008 Lehman Brothers Holdings Inc. filed for chapter 11 bankruptcy protection, triggering a 500-point drop in the Dow. The following economic decline was precipitous. By October 11, 2008, the global financial system was on the brink of systemic meltdown. 14 The crisis spread to nearly every industry, including the travel and hospitality industry. Coupled with an increase in supply, the economic downturn devastated the hospitality and lodging industries. As evidence of this, in 2009, RevPAR in the hotel industry experienced the largest annual decline since the Great Depression, falling by 16.7 percent. Contributing to the RevPAR decline in 2009, the industrys average daily rate, or ADR, fell by 8.8 percent, compared to a 20-year industry annual average increase of 2.8 percent. In 2009, the average daily occupancy rate decreased by 8.6 percent, compared to a 20-year industry annual average decline of 0.7 percent. The Debtors, of course, were not insulated from these record-breaking declines plaguing the hotel industry. In 2009, the Debtors RevPAR, ADR, and occupancy rate metrics decreased by 16.3 percent, 10.8 percent, and 6.1 percent, respectively. Simply put, the scope and intensity of the decline in the hospitality industry that triggered Innkeepers liquidity issues that eventually led to its chapter 11 filing were not foreseeable events.
13 See id. 6. 14 http://www.telegraph.co.uk/finance/financialcrisis/3181004/IMF-warns-of-world-financial-system-meltdown- Financial-crisis.html
12 K&E 19103759 C. Innkeepers Capital Structure. 15
19. As of the Petition Date, the Debtors had incurred aggregate funded secured indebtedness of approximately $1.42 billion, consisting of the following: The $825 Million Fixed Rate Pool Mortgage Loan, dated as of June 29, 2007 and maturing on July 9, 2017, which loan is collateralized by 45 hotels. The $250 Million Floating Rate Pool Mortgage Loan, dated as of June 29, 2007 and matured on July 9, 2010, which loan is collateralized by 19 hotels. 16
The $118 Million Floating Rate Pool Mezzanine Loan, dated as of June 29, 2007 and matured on July 9, 2010, which loan is collateralized by Grand Prix Mezz Borrower Floating 2, LLCs equity interests in the 20 hotels that are borrowers under the Floating Rate Pool Mortgage Loan. The $13.7 Million Anaheim Hotel Mortgage Loan, dated as of June 14, 2005 and matured on July 1, 2010, which loan is collateralized by the Hilton Suites in Anaheim, California. The $21.3 Million Anaheim Hotel Mezzanine Loan, dated as of June 29, 2007 and matured on July 1, 2010, which loan is collateralized by Grand Prix Mezz Borrower Term, LLCs equity interest in KPA HS Anaheim. The $47.4 Million San Diego Hotel Mortgage Loan, dated as of October 4, 2006 and maturing on November 11, 2016, which loan is collateralized by the Residence Inn by Marriott in San Diego, California. The $37.6 Million Garden Grove Hotel Mortgage Loan, dated as of October 4, 2006 and maturing on November 11, 2016, which loan is collateralized by the Residence Inn by Marriott in Garden Grove, California. The $35.0 Million Ontario Hotel Mortgage Loan, dated June 29, 2007 and maturing on November 11, 2016, which loan is collateralized by the Hilton in Ontario, California. The $25.6 Million Washington DC Hotel Mortgage Loan, dated as of September 21, 2006 and maturing on October 1, 2016, which loan is collateralized by the Doubletree Guest Suites in Washington, D.C.
15 See Beilinson Decl. 7-8. 16 As provided in further detail in Article IV.A.7 of the Disclosure Statement, during the course of these Chapter 11 Cases, the Debtors ceased operating one unprofitable hotel that had previously secured the Floating Rate Pool Mortgage Loan.
13 K&E 19103759 The $25.2 Tysons Corner Hotel Mortgage Loan, dated as of September 19, 2006 and maturing on October 1, 2016, which loan is collateralized by the Residence Inn by Marriott in Vienna, Virginia. The $24.2 Million San Antonio Hotel Mortgage Loan, dated as of September 19, 2006 and maturing on October 1, 2016, which loan is collateralized by the Homewood Suites in San Antonio, Texas. 20. Apollo owns all of the preferred and common equity interests in Debtor Grand Prix Holdings. 17 Grand Prix Holdings owns substantially all of the Innkeepers USA Trust Preferred A Interests in Innkeepers USA Trust, its immediate subsidiary. Innkeepers has also issued the Innkeepers USA Trust Preferred C Interests, which are 8% cumulative perpetual preferred shares owned by non-Debtors. II. Prepetition Restructuring Efforts and Transition Into Chapter 11. A. Innkeepers Navigates the Global Economic Crisis. 18
21. Innkeepers restructuring efforts began in 2008 in the midst of a global economic crisis that severely limited access to capital and customer demand for hotel accommodations. These economic effects severely diminished Innkeepers cash flows, forcing Innkeepers to choose between debt service and funding capital expenditures, including PIPs. Innkeepers elected not to default on its debt obligations, restricting the companys ability to fund PIPs and other capital expenditures required under its respective franchise agreements. In response, franchisors expressed increased concern over Innkeepers ability to continue to satisfy franchise agreement obligations.
17 Apollo is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. Apollos common stock is listed and traded on the NASDAQ under the ticker symbol AINV. Apollo is managed by Apollo Investment Management, an affiliate of Apollo Global Management, LLC. Apollos corporate governance is overseen by an independent board of directors. 18 See Beilinson Decl. 9-12.
14 K&E 19103759 22. Innkeepers took proactive steps to reduce costs, restructure its business operations, and address operational cash shortfalls. In November 2008, Innkeepers hired Marc Beilinson, an independent director of Innkeepers since 2007, as chief restructuring officer. 23. At the direction of the Board, Innkeepers management team implemented the following initiatives: a company-wide labor reduction to the minimal staffing levels possible without harming guest satisfaction; a 5% salary reduction for all personnel; the renegotiation of benefit programs in an effort to lower costs (with employees share of obligations increased); substantially increased the Debtors e-commerce functionality to bolster declining revenues; the suspension of the Debtors discretionary 401(k) plan matching; the suspension of distributions to holders of Innkeepers USA Trust Preferred C Interests beginning in December 2008; negotiations with Lehman resulting in amendments to the Floating Rate Pool Mortgage Loan Agreement and the Floating Rate Pool Mezzanine Loan Agreement, which included maturity extensions, elimination of certain guarantys, and modifications to interest rates; the reduction of certain fixed costs, including vendor supply contracts, the renegotiation of maintenance, and grounds cleaning; and the immediate cessation of all non-emergency capital expenditures on the hotel properties beginning in late 2008 and the related settlement for approximately $8.5 million of approximately $13.1 million of outstanding capital expenditure obligations for work performed and goods ordered. The results of these efforts were positive. From 2008 to 2010, Innkeepers was able to reduce its annual costs by approximately $24 million, postponing the Debtors chapter 11 filings and providing the company time to negotiate with its franchisors and key creditors.
15 K&E 19103759 24. Innkeepers management team also focused on preserving Innkeepers vital relationships with their franchisors, which are managed at an enterprise level to maximize the long-term viability of the Debtors entire hotel portfolio. The importance of Innkeepers franchise relationships cannot be overstated. The loss of a franchise agreement for a single hotel would have an immediate and material adverse effect on the underlying value of that hotel due to the loss of associated name recognition, marketing support, brand loyalty, and centralized reservation systems provided by the franchisor. 19 The loss of franchise agreements for numerous hotelsespecially the Generation 1 Residence Inn by Marriott for which there is no opportunity to rebrand with franchises comparable to Residence Innwould have a devastating effect on the Debtors overall business. The Debtors inability to invest in their hotel properties and the concomitant risk they would lose access to valuable brand names meant that maximizing the value of their estates required a comprehensive restructuring of the entire capital structure with the support of their franchisorsparticularly Marriott, the Debtors largest franchisor, and Hilton. B. Innkeepers Engages Marriott in Negotiations. 20
25. Marriott is the franchisor for 41 of the Debtors 71 properties. Recognizing the importance of the Marriott franchise to the success of the enterprise, the Debtors management made it a priority at the outset of the restructuring to solidify that relationship. 26. Notwithstanding previous agreements and negotiations with Marriott to expand the time period for the Debtors to complete their PIPs, the Debtors had simply been unable to
19 Pursuant to that certain Settlement Agreement entered by and among the Debtors and Marriott, dated as of August 24, 2010, and which was approved by the Court on August 31, 2010 [Docket No. 357], the Debtors and Marriott agreed to de-flag the Troy Hotel. The Troy Hotel, now operating without the Marriott brand, experienced an immediate and significant decline in revenue, noticeable only 31.5 days from de-flagging. After de-flagging, RevPar has dropped 45.4% and EBITDA dropped by over half a million dollars a year and is now negative. 20 See Beilinson Decl. 13-15.
16 K&E 19103759 comply with many of their obligations under the Marriott franchise agreements. Prepetition, the Debtors received numerous notices of potential default from their franchisors, including 23 notices of default from Marriott. The Marriott default notices stated that, if the Debtors failed to perform the required PIP obligations in a timely manner, the 23 Marriott franchise agreements would terminate. 27. To avoid any such termination, management worked hard to ensure it would be able to sufficiently fund the PIPs and other required capital expenditures on Marriott-branded hotel properties. Marriott expressed a willingness to continue its relationship with Innkeepers if Innkeepers: (a) funded a segregated account with cash sufficient to fund the completion of the Debtors outstanding PIPs, (b) provided assurance that it would have the ability to satisfy their obligations under the franchise agreements going forward, and (c) provided Marriott with daily updates regarding its restructuring efforts. Because Innkeepers needed to de-lever its balance sheet, Innkeepers began to prepare to file these Chapter 11 Cases and explore debtor-in- possession financing options. C. Innkeepers Explores a Restructuring Transaction Sponsored by Lehman. 21
28. At a time when the hospitality and lodging industry was suffering through its toughest environment in decades, Innkeepers options for third-party investments were limited, if not non-existent. Accordingly, Innkeepers focused on its current lendersin particular, Lehman. Lehman was a natural partner for Innkeepers. First, Lehman was the lender under the Debtors second-largest mortgage loan. Second, Lehman underwrote the loans for substantially all of the Debtors assets before those loans were securitized into the commercial mortgage-backed securities market. Lehman was, therefore, familiar with a significant portion
21 See id. 16-17.
17 K&E 19103759 of the Debtors assets. Third, unlike Midland and LNR, which would have been unable to engage in a debt-for-equity transaction due to REMIC restrictions, Lehman had the ability to complete a debt-for-equity transaction. 29. Lehman, of course, was in the midst of its own bankruptcy, and the prospect of a debtor in possession taking equity in another debtor was a highly unusual natural transaction. But after months of negotiations, Lehman agreed to convert its debt to equity. D. Apollo Supports Innkeepers Restructuring Efforts. 22
30. Throughout 2009 and 2010, Apollo supported Innkeepers restructuring efforts while Innkeepers and its advisors negotiated, among other things, the Marriott Adequate Assurance Agreement, the DIP Financings (each as defined herein), and the use of cash collateral, and drafted first day pleadings aimed at easing the transition into chapter 11. Among other things, Apollo was willing to backstop the Debtors debtor-in-possession financing, providing the Debtors flexibility in their negotiations with other third-party lenders and reassuring Marriott that the Debtors would have access to cash to fund their PIP obligations. E. Negotiations with Marriott, Lehman, and Other Parties, and the Resulting Series of Interrelated Agreements. 31. Ultimately, Innkeepers prepetition negotiations culminated in a series of interrelated agreements that were to be implemented through the Chapter 11 Casesthe Marriott Adequate Assurance Agreement; the Plan Support Agreement; the DIP Financings; and the Cash Collateral Order (each as defined herein). 23 The common goal of these agreements was to: (a) de-leverage Innkeepers balance sheet, minimize interest payments, and make additional cash available for operations; and (b) protect the franchisors by providing funds for the PIPs and other
22 See id. 18. 23 Id. 19.
18 K&E 19103759 capital expenditures necessary to retain premium brand affiliations, maintain customer loyalty, and improve Innkeepers industry market share. 24
1. Marriott Adequate Assurance Agreement. 25
32. On June 25, 2010 (more than three weeks before the Petition Date), the Debtors and Marriott entered into the Marriott Adequate Assurance Agreement. Among other things, the terms and conditions of the Marriott Adequate Assurance Agreement provide that Marriott will (a) forbear from exercising its remedies under the franchise agreements, (b) forbear from seeking relief from the automatic stay, and (c) permit the Debtors to assume the franchise agreements for the Marriott hotels that have defaulted under the franchise agreements. In consideration for the foregoing, Innkeepers agreed to perform certain PIPs for the defaulted Marriott hotels according to a three-phase schedule ending November 20, 2011, and file a motion, contemporaneously with the petition date, seeking approval of DIP financing within 60 days. The agreement allowed the Debtors to avoid significant value destruction resulting from termination of their franchise agreements (subject to compliance with the agreement), maintain the Debtors valuable relationship with Marriott, and unlock substantial value of the Debtors business by reassuring franchisors, creditors, and potential investors of the Debtors business survivability. 2. Plan Support Agreement. 26
33. On July 17, 2010 (two days before the Petition Date), the Debtors and Lehman entered into the plan support agreement (the Plan Support Agreement). The purpose of the Plan Support Agreement was to effectuate a restructuring that would (a) reduce the Debtors indebtedness by converting Lehmans secured debt to equity, (b) improve cash flows by
24 Id. 25 See id. 20. 26 See id. 21-22.
19 K&E 19103759 significantly reducing debt service obligations, and (c) provide additional capital to facilitate the successful implementation of the Debtors business plan, including capital to complete certain PIPs. In addition, Lehman committed to support the Debtors restructuring efforts and plan of reorganization. Importantly, the Debtors fought hard to prevent cross-default provisions related to the approval of the Plan Support Agreement from inclusion in the Marriott Adequate Assurance Agreement and the DIP Financing agreements. 3. DIP Financing Agreements. 27
34. In connection with the Marriott Adequate Assurance Agreement, the Debtors successfully negotiated two debtor-in-possession financing facilities (together, the DIP Financings): Five Mile, the largest certificateholder in the Debtors Fixed Rate Pool Mortgage Loan, after being brought to the negotiation table by Midland, was willing to provide the Five Mile DIP Facility in the amount of $50.75 million to fund the PIPs on certain hotels securing the Debtors obligations under the Fixed Rate Pool Mortgage Loan Agreement, the San Diego Hotel Mortgage Loan Agreement, and the Tysons Corner Hotel Mortgage Loan Agreement. Lehman was willing to provide the Lehman DIP Facility in the amount of $17 million, the proceeds of which were used to perform PIPs and certain other investments on certain hotels securing the Debtors obligations under the Floating Rate Pool Mortgage Loan Agreement. 35. Both DIP Financings were critically helpful to fund PIP completion and preserve and enhance value of the Debtors estates. 4. The Cash Collateral Order and Cash Management Order. 28
36. Innkeepers successfully negotiated a form of order with Lehman that allowed the Debtors to continue using their consolidated cash management system and provided access to
27 See id. 23-24. 28 See id. 25.
20 K&E 19103759 cash collateral to fund their business operations after the Petition Date. 29 Innkeepers also worked with its other secured lenders in an effort to gain their consent prior to the filing of the Chapter 11 Cases. The Cash Collateral Order and Cash Management Order allowed the Debtors to honor their obligations to parties that provide goods and services, including the Debtors franchisors, employees, hotel management companies, suppliers of hotel-related goods and services, utilities, and taxing authorities, which are critically important to the preservation and maintenance of the value of the Debtors and the continued operations of the Debtors and the restructuring. III. The Chapter 11 Cases. 30
37. On July 19, 2010, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, commencing the Chapter 11 Cases. 31 Much of the work done before the Petition Date created positive momentum for the Chapter 11 Cases. The Marriott Adequate Assurance Agreement, the DIP Financings, and the Cash Collateral Order established the necessary building blocks at the beginning of the Chapter 11 Cases to unlock value. For instance, these agreements together provided the Debtors with time and funds to complete the PIPs necessary to secure their franchises, and most significantly, the support of their largest franchisor. 38. On the Petition Date, the Debtors filed motions seeking approval of the DIP Financings, the Cash Collateral Order, and the Plan Support Agreement. As the Court is well aware, Midland, TriMont, and LNR objected to each of those motions. On September 1 and 2,
29 See Final Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines, entered September 2, 2010 [Docket No. 401] (as amended, the Cash Management Order) and Final Order Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 361, and 363, entered on September 2, 2010 [Docket No. 402] (as amended, the Cash Collateral Order). 30 See id. 26. 31 On July 28, 2010, the U.S. Trustee appointed the Creditors Committee.
21 K&E 19103759 2010, the Court entered orders approving the DIP motions [Docket Nos. 385 and 400, as amended] and final orders approving the Cash Management Motion and the Cash Collateral Motion [Docket Nos. 401 and 402, as amended], though the Court did not approve the Plan Support Agreement [Docket No. 403]. After the hearing on the Plan Support Agreement, the Debtors quickly refocused their restructuring efforts on conducting a comprehensive marketing process. A. The Debtors Robust Marketing and Sale Process. 32
39. As outlined in detail in the Disclosure Statement and numerous declarations that have been filed in the Chapter 11 Cases, the Debtors ran their extensive marketing process for all of their assets, on both enterprise level and non-enterprise level bases. Beginning in September 2010, the Debtors and their advisors, including the Independent Committee of the board of trustees of Innkeepers USA Trust (the Board) and the full Board conferred numerous times regarding the plan process going forward and the selection of a stalking horse bidder. The Debtors identified Five Mile and four other stalking horse candidates, which list included large private equity firms and real estate-focused investors, based on, among other criteria: (a) availability of funds; (b) breadth and depth of experience within the lodging sector; (c) familiarity with the bankruptcy process; and (d) ability to execute due diligence in a timely manner. 40. On November 10, 2010, the Debtors distributed a process letter to the stalking horse candidates outlining a timeframe and requesting indications of interest on or before November 23, 2010 (the Process Letter). Prior to the bid deadline, the Debtors management
32 See Derrough Decl. 8-19.
22 K&E 19103759 and advisors spent considerable time negotiating with various potential bidders, creating a competitive tension that served to increase the value of bids ultimately submitted. 41. Following the November 23, 2010 bid deadline provided for in the Process Letter, four of the five stalking horse candidates, including Five Mile and Lehman (together as a bidder, Five Mile/Lehman), responded with proposals. The Debtors engaged in near around-the- clock negotiations, finally, on December 23, 2010, settling on the bid submitted jointly by Five Mile/Lehman for all of the Debtors assets (the Original Stalking Horse Proposal). 42. On January 14, 2011, the Debtors filed a motion to, among other things, approve the Original Stalking Horse Proposal and related bidding procedures. 43. In addition to pursuing the Original Stalking Horse Proposal through the stalking horse process, the Debtors and their advisors continued to engage in a broad marketing process, which was deliberately and carefully designed to maximize the value of the estates. As part of this effort, the Debtors management and Moelis & Company LLC (Moelis), the Debtors financial advisor, issued process letters, press releases, attended a lodging conference, and conducted numerous meetings with principals, attorneys, financial advisors, and other representatives of the Debtors key constituencies. 44. As described below, although the Original Stalking Horse Proposal encompassed all of the Debtors hotels, as a result of the Ad Hoc Committee submitting certain bids that likely rendered the Original Stalking Horse Proposal unconfirmable, the Debtors determined that splitting off the properties that did not collateralize the Seven Sisters 33 from the Original
33 The properties commonly known in these cases as the Seven Sisters are those of the Debtors hotels which do not serve as collateral for either the Fixed Rate Pool Mortgage Loan Agreement or the Floating Rate Pool Mortgage Loan Agreement. Together, they are: Hilton Suites in Anaheim, California; Hilton in Ontario, California; Residence Inn by Marriott in Mission Valley, California; Residence Inn by Marriott in Anaheim, California; Doubletree Guest Suites in Washington, DC; Residence Inn by Marriott in Tysons Corner, Virginia; and Homewood Suites in San Antonio, Texas.
23 K&E 19103759 Stalking Horse Bid would maximize valueultimately resulting in approximately $50 million of extra value for the Debtors estates. 45. On February 15, 2011, the Debtors received an offer from Lehman to modify the Original Stalking Horse Proposal with certain proposed amendments that envisioned carving out those Debtors that own and/or lease the Seven Sisters. 46. On March 9, 2011, after multiple rounds of negotiations, the parties ultimately reached an agreement to modify the Original Stalking Horse Proposal. In addition to, among other things, carving out the Seven Sisters, as a prerequisite to move forward with Five Mile/Lehman, Five Mile/Lehman conceded and eliminated the $7 million break-up fee (creating $7 million of additional value for the Debtors estates). This agreement was memorialized in the final Five Mile/Lehman Commitment Letter with Five Mile, Lehman, and Midland, reflecting revised terms to the Original Stalking Horse Proposal (the Final Stalking Horse Proposal). The Final Stalking Horse Proposal contemplates restructuring the 64 properties that serve as collateral under the Fixed Rate Pool Mortgage Loan Agreement and the Floating Rate Pool Mortgage Loan Agreement (the Fixed/Floating Properties). 47. On March 11, 2011, the Court entered an order approving the Final Stalking Horse Proposal, granting authority to reimburse Five Mile/Lehman for up to $3 million in expenses under certain circumstances, and approving bidding procedures pursuant to which the Debtors could conduct an auction for the Fixed/Floating Properties [Docket No. 1099] (the Bidding Procedures Order). 48. On April 8, 2011, per the agreement embodied in the Final Stalking Horse Proposal, the Debtors filed the Plan and the Disclosure Statement for Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1093]
24 K&E 19103759 (the Disclosure Statement). On April 8, 2011, the Debtors also filed the Debtors Motion for Entry of an Order Approving (A) Adequacy of the Disclosure Statement; (B) Certain Dates Related to Confirmation of the Plan; (C) Certain Voting Procedures and the Form of Certain Documents to be Distributed in Connection with Solicitation of the Plan; and (D) Proposed Voting and General Tabulation Procedures [Docket No. 1095] (the Disclosure Statement Motion). B. The Auction and Plan Process. 49. The Debtors anticipated that, as a result of their marketing efforts, they might receive bids for the LNR Properties (as defined below) in connection with bids for the Fixed/Floating Properties and that the winning bid at the auction for the Fixed/Floating Properties could encapsulate the LNR Properties. 34 The Debtors encouraged potential bidders to submit formal bids for both the Fixed/Floating Properties and LNR Properties on or before April 25, 2011 (the bid deadline approved in the Bidding Procedures Order with respect to overbids on the Final Stalking Horse Proposal) (the Bid Deadline), after which the Debtors would hold a formal auction for the Fixed/Floating Properties, the LNR Properties, or both. 35
50. On April 25, 2011, the Debtors received the following bids: 36
A bid for the 45 hotels that serve as collateral for the Debtors fixed rate mortgage loan and six of the Seven Sisters (which include the five properties that serve as collateral for the mortgage loans for which LNR is special servicer (the LNR Properties)); Two bids for the LNR Properties; Six bids on multiple assets; Six bids on individual assets; and One bid for the Fixed/Floating Properties.
34 Derrough Decl. 48. 35 Id. 20. 36 Id. 21.
25 K&E 19103759 51. After the Bid Deadline, the Debtors reviewed all timely submitted bids and engaged in negotiations with entities that submitted bids satisfying the bid conditions established by the Bidding Procedures Order. 37
1. The Fixed/Floating Auction. 52. On April 29, 2011, the Debtors named the bid jointly submitted by Cerberus and Chatham Trust for the Fixed/Floating Properties as the baseline bid for the auction in accordance with the Bidding Procedures (the Cerberus/Chatham Baseline Bid). With the selection of the Cerberus/Chatham Baseline Bid, the Debtors proceeded with an auction for the Fixed/Floating Properties in accordance with the Bidding Procedures Order on May 2 and 3, 2011. 38 After twelve rounds of competitive bidding between Five Mile/Lehman and Cerberus/Chatham, the Debtors closed the auction for the Fixed/Floating Properties after an unchallenged bid from Cerberus/Chatham valued at approximately $1.12 billion. 39
53. The auction process thus yielded approximately $154 million in value over and above the Five Mile/Lehman stalking horse bid. Since the closing of the auction, no bidder has come forward with a higher or better offer for the Fixed/Floating Properties, and no bidder has questioned the process itself. 40
2. The LNR Properties Auction. 41
54. On May 3, 2011, after concluding the auction for the Fixed/Floating Properties, the Debtors commenced the auction for the LNR Properties. Of the bids received for the LNR Properties, the highest and best offer came from Chatham Lodging LP (Chatham L.P. and its
26 K&E 19103759 bid, the Chatham Bid). With a purchase price of $195 million, the Chatham Bid provided baseline recoveries for all constituents holding claims against or interests in the Debtors that currently own the LNR Properties. Since the closing of the auction, no bidder has come forward with a higher or better offer for the LNR Properties, and no bidder has questioned the process itself. C. Financing for the Successful Bids. 42
55. Prior to the commencement of the auctions, the Debtors actively assisted bidders in their efforts to obtain financing to fund all or a portion of their bids. The Debtors contacted 11 potential financing sources to explore their willingness to provide financing to potential purchasers. The prepetition secured creditorsMidland and LNRwere the most willing to provide financing on reasonable terms. 56. Pursuant to the Final Stalking Horse Proposal and the commitment between Five Mile and Midland in support thereof, Midland agreed to make stapled financing available to competing bidders submitting qualified bids at the auction (the Midland Financing). The amount of Midland Financing available to a competing bidder was to be determined by a sliding scale beginning at $622.5 million plus 70% of any overbid amount minus $8 million, provided that the debt-capitalization ratio of the Fixed/Floating Debtors would not exceed 70%. Ultimately, Cerberus/Chatham utilized the Midland Financing in its winning bid. 57. Before commencing the auction for the LNR Properties, the Debtors engaged certain of their constituents to (a) establish a framework to allocate value among certain holders of claims and interests related to the LNR Properties and (b) secure financing for bidders to use in a value-maximizing bid for the LNR Properties.
42 See id. 30-33.
27 K&E 19103759 58. On May 3, 2011, the Debtors, LNR, and the Ad Hoc Committee entered into an agreement (which the Court approved on May 16, 2011 [Docket. No. 1397]) that memorialized, among other things, (a) a structure to allocate value generated through the sale of the LNR Properties; (b) certain parties agreement to support the bid protections offered to Chatham L.P. (the purchaser of the LNR Properties) and the Disclosure Statement as it relates to the LNR Properties; (c) LNRs agreement to provide financing to Chatham L.P. in connection with its bid (the LNR Financing); (d) the release of claims against certain parties; and (e) the Debtors payment of certain fees related to the restructuring. With the LNR Financing in place, Chatham L.P. submitted a $195 million bid for the LNR Properties, which was $8 million over the next highest offer received. D. Claims Objections. 59. To date, the Debtors have filed nine omnibus claims objections, 43 which addressed 1,224 claims with an aggregate value of approximately $1.25 billion. The Court has entered six orders approving claims objections 44 and the remaining three claims objections (and
43 See Debtors First Omnibus Objection to Certain Amended and Replaced Proofs of Claim, filed Mar. 29, 2011 [Docket No. 1067]; Debtors Second Omnibus Objection to Certain Duplicative Proofs of Claim, filed Mar. 29, 2011 [Docket No. 1068]; Debtors Third Omnibus Objection to Claims (Chartis Claims), filed Apr. 19, 2011 [Docket No. 1123]; Debtors Fourth Omnibus Objection to Claims (Insufficient Support Claims, No Liability Claims, Claims to be Reclassified, Claims to be Adjusted, Claims to be Reduced and Equity Interest Claim), filed Apr. 19, 2011 [Docket No. 1125]; Debtors Fifth Omnibus Objection to Claims (Claims to be Reclassified and, In Certain Cases, Reduced), filed Apr. 20, 2011 [Docket No. 1127]; Debtors Sixth Omnibus Objection to Claims (Wrong Debtor Claims), filed Apr. 20, 2011 [Docket No. 1129]; Debtors Seventh Omnibus Objection to Claims (Amended and Replaced Claims), filed Apr. 20, 2011 [Docket No. 1131]; Debtors Eighth Omnibus Objection to Claims (Claims to be Reclassified, Claims to be Adjusted, Compound Claims to be Reclassified, Wrong Debtor Claims, No Liability Claims, and Amended and Replaced Claims), filed May 24, 2011 [Docket No. 1483]; Debtors Ninth Omnibus Objection to Claims (Claims to be Reclassified, Claims to be Adjusted, Compound Claims to be Reclassified, Wrong Debtor Claims, No Liability Claims, Amended and Replaced Claims, and Duplicative Claims, filed Jun. 15, 2011 [Docket No. 1709]. 44 See Order Granting Debtors First Omnibus Objection to Certain Amended and Replaced Proofs of Claim, entered Apr. 28, 2011 [Docket No. 1159]; Order Granting Debtors Second Omnibus Objection to Certain Duplicative Proofs of Claim, entered Apr. 28, 2011 [Docket No. 1160]; Order Granting Debtors Fourth Omnibus Objection to Claims (Insufficient Support Claims, No Liability Claims, Claims to be Reclassified, Claims to be Adjusted, Claims to be Reduced and Equity Interest Claim), entered May 25, 2011 [Docket No. 1487]; Order Granting Debtors Fifth Omnibus Objection to Claims (Claims to be Reclassified and, In
28 K&E 19103759 any adjournments of individual claims objected to in but later carved out from the six claims objections already approved by the Court) are currently scheduled for hearing on July 21, 2011 at 3:00 p.m. (prevailing Eastern Time). E. The Disclosure Statement and Plan. 60. On May 9, 2011, the Debtors filed a revised version of the Disclosure Statement [Docket No. 1208]. On May 20, 2011, the Debtors filed further revised versions of the Plan and Disclosure Statement [Docket Nos. 1445 and 1444, respectively]. 61. On May 19, 2011, the Court entered the Order Approving (A) Adequacy of the Disclosure Statement; (B) Certain Dates Related to Confirmation of the Plan; (C) Certain Voting Procedures and the Form of Certain Documents to be Distributed in Connection with Solicitation of the Plan; and (D) Proposed Voting and General Tabulation Procedures [Docket No. 1441] (the Disclosure Statement Order), approving the Disclosure Statement as containing adequate information within the meaning of section 1125 of the Bankruptcy Code and authorizing the Debtors, through their Notice and Claims Agent, to distribute Solicitation Packages to holders of claims and interests entitled to vote on the Plan and other materials to those holders of claims and interests not entitled to vote. 62. On May 21, 2011, the Debtors began soliciting votes on the Plan, and, through their Notice and Claims Agent, distributed Solicitation Packages in accordance with the Disclosure Statement Order. 63. Throughout the solicitation period, the Debtors continued to work with parties to resolve issues related to the Plan. Among other things, the Debtors successfully negotiated a
Certain Cases, Reduced), entered May 25, 2011 [Docket No. 1488]; Order Granting Debtors Sixth Omnibus Objection to Claims (Wrong Debtor Claims), entered May 25, 2011 [Docket No. 1489]; Order Granting Debtors Seventh Omnibus Objection to Claims (Amended and Replaced Claims), entered May 25, 2011 [Docket No. 1490].
29 K&E 19103759 voting stipulation with Midland, Lehman, C-III, and TriMont, pursuant to which those parties were entitled to vote on the Grand Prix Holdings Plan on account of certain guaranty claims that those parties have asserted (and the Debtors dispute) against Grand Prix Holdings. Subsequent to the entry of that stipulation, the Debtors and C-III reached an agreement pursuant to which C-IIIs guaranty claim against Grand Prix Holdings would be allowed, subject to a $1.5 million cap. 64. On June 23, 2011, the Debtors filed this Memorandum, certain amendments to the Plan Supplement and the proposed Findings of Fact, Conclusions of Law, and Order Confirming the Debtors Second Amended Joint Plan Pursuant to Chapter 11 of the Bankruptcy Code (the Confirmation Order). The Confirmation Hearing is scheduled to begin on June 23, 2011. IV. Operations During the Chapter 11 Cases. 45
65. Though largely unnoticed during the Chapter 11 Cases, the Debtors operational performance has exceeded expectations. This is a direct result of the Debtors continuing efforts to cut costs and focus on ensuring the uninterrupted operation of their business through the bankruptcy filing. Since the filing, the Debtors have also directed their efforts to complying with those key agreements negotiated prepetition that are largely responsible for unlocking the substantial value received as a result of the marketing and sale process. The Debtors have worked to accomplish a number of tasks and goals, including but not limited to: (a) ensuring compliance with their PIP obligations; (b) meeting requirements under the Cash Collateral Order and ensuring that no inter-debt borrowing was required; (c) operating within the budgets established by the DIP Financings; and (d) maximizing hotel performance.
45 See Beilinson Decl. 27.
30 K&E 19103759 A. Substantial Compliance with PIP Obligations. 46
66. Given the importance of the Debtors franchise relationships, the Debtors have spent a considerable amount of time making sure they comply with their PIP and capital expenditure requirements. The Marriott Adequate Assurance Agreement requires the completion of all 23 outstanding PIPs by October 27, 2011. The magnitude of work required to complete the PIPs within this narrow window of time is enormous. The Debtors have been in substantial compliance with the PIP completion schedule required under the Marriott Adequate Assurance Agreement. 67. The Debtors are subject to PIP requirements under their other franchise agreements. To date, 11 PIPs have been substantially completed. Another 19 PIPs are in their initial stages. Out of the $73.0 million set aside to perform PIP work, the Debtors have spent approximately $36.4 million to date and expect to be approximately $9.8 million under budget after the completion of all Marriott- and non-Marriott-related PIPs. B. Compliance with the Cash Collateral Order. 47
68. Although the Debtors use of cash collateral initially was hotly contested, 48 there has been no material issue with the Debtors management, reporting, or allocation of cash collateral. Throughout the Chapter 11 Cases, the Debtors have provided detailed reporting, including semi-weekly Flash Reports, Variance Reports, 13-Week Cash Forecasts and Application Reports (each of which as defined in the Cash Collateral Order), as well as compilation of additional data for special requests. To date, except for a few inquiries about
46 See id. 28-29. 47 See id. 30-31. 48 See Docket Nos. 36, 254, 255, 257, 265, and 279.
31 K&E 19103759 allocation and certain parties reservation of rights, there have been no disputes over allocation of costs. 69. Certain secured lenders expressed a concern regarding intercompany borrowing. Again, these concerns proved unwarranted. Through careful planning and detailed forecasting, the Debtors were not only able to avoid any inter-debt pool borrowings, but disbursed excess cash of approximately $25.4 million to the various lenders. The Debtors were able to minimize the effect of the Chapter 11 Cases on the Debtors cash management system while protecting the interests of their secured lenders and allowing the Debtors business to continue running in an efficient manner. C. Compliance with the DIP Financings. 49
70. After the Court approved the DIP Financings, the Debtors worked diligently to close the financing arrangements. Since closing, the Debtors have ensured that their PIP completion work has stayed well within the DIP budgets. The Debtors continue to work with their DIP lenders to release funds necessary to complete the required PIPs. The Debtors have drawn on the Five Mile DIP Facility 34 times and disbursed approximately $29.1 million of the $50.7 million budget. With respect to the Lehman DIP Facility, the Debtors disbursed approximately $5.9 million of the $17.5 million budget. D. Postpetition Operating Outperformance. 50
71. Postpetition, the Debtors business performance has exceeded expectations through April 2011, especially with respect to cash flows. For example, Comparable Hotel (all hotels except hotels under renovation and deflagged hotels) performance has been strong through April 2011. Total revenue and hotel EBITDA has improved versus last year by 6.2% and 5.9%,
49 See Beilinson Decl. 32. 50 See id. 33.
32 K&E 19103759 respectively. Comparable Hotel RevPar has increased by approximately $5.59 or 7.3% from $76.37 to $81.96. In addition to improved year over year performance, the Comparable Hotels have performed better than their competitive sets with the overall RevPar Index improving by 2.3% from 121.7 to 124.4. V. Voting Overview. 72. In accordance with section 1126 of the Bankruptcy Code, the Plan provides that only holders of claims and interests in impaired classes receiving or retaining property on account of such claims or interests may vote on the Plan. In addition, holders of claims are not entitled to vote if their contractual rights are (a) unimpaired by the Plan or (b) impaired by the Plan such that they will receive no distribution of property under the Plan. 73. The following classes of claims for applicable Debtors are unimpaired by the Plan. These classes were not entitled to vote on the Plan and are presumed to accept the Plan. The holders of such claims were not solicited to vote on the Plan. Class Claims and Interests Status Voting Rights Class FF1 Other Priority Claims against Fixed/Floating Debtors Unimpaired Presumed to Accept Class FF2 Other Secured Claims against Fixed/Floating Debtors Unimpaired Presumed to Accept Class A1 Other Priority Claims against Anaheim Hotel Debtors Unimpaired Presumed to Accept Class A2 Other Secured Claims against Anaheim Hotel Debtors Unimpaired Presumed to Accept Class A3 Secured Anaheim Hotel Mortgage Loan Claims Unimpaired Presumed to Accept Class A8A Section 510(b) Claims against Anaheim Hotel Owner Unimpaired Presumed to Accept Class A8C Section 510(b) Claims against Anaheim Hotel Lessee Unimpaired Presumed to Accept Class O1 Other Priority Claims against Ontario Hotel Debtors Unimpaired Presumed to Accept Class O2 Other Secured Claims Ontario Hotel Debtors Unimpaired Presumed to Accept Class R1 Other Priority Claims against the Remaining Debtors Unimpaired Presumed to Accept Class R2 Other Secured Claims against the Remaining Debtors Unimpaired Presumed to Accept Class R6 Intercompany Interests in the Remaining Debtors Unimpaired Presumed to Accept
33 K&E 19103759
74. The following classes of claims for applicable Debtors are fully impaired by the Plan. These classes were not entitled to vote on the Plan and are deemed to reject the Plan. The holders of such claims were not solicited to vote on the Plan. Class Claims and Interests Status Voting Rights Class FF6 Mortgage Loan Deficiency Claims Against Fixed/Floating Debtors Impaired Deemed to Reject Class FF7 Intercompany Claims Against Fixed/Floating Debtors Impaired Deemed to Reject Class FF8 Section 510(b) Claims Against Fixed/Floating Debtors Impaired Deemed to Reject Class FF9 Interests in Fixed/Floating Debtors Impaired Deemed to Reject Class A5B General Unsecured Claims against Anaheim Mezzanine Debtor Impaired Deemed to Reject Class A6 Anaheim Hotel Mezzanine Loan Deficiency Claims against Anaheim Hotel Debtors Impaired Deemed to Reject Class A7 Intercompany Claims against Anaheim Hotel Debtors Impaired Deemed to Reject Class A8 Intercompany Interests in Anaheim Hotel Debtors Impaired Deemed to Reject Class O5 Ontario Hotel Mortgage Loan Deficiency Claims Impaired Deemed to Reject Class O6 Intercompany Claims against Ontario Hotel Debtors Impaired Deemed to Reject Class O7 Section 510(b) Claims against Ontario Hotel Debtors Impaired Deemed to Reject Class O8 Intercompany Interests in Ontario Hotel Debtors Impaired Deemed to Reject Class R5 Intercompany Claims against the Remaining Debtors Impaired Deemed to Reject Class R7 Innkeepers USA LP Preferred D Interests Impaired Deemed to Reject Class R10 Innkeepers USA Trust Common Interests Impaired Deemed to Reject
75. Accordingly, the Debtors only solicited holders of claims in impaired classes receiving or retaining property account of such claims. The voting results, as reflected in the Voting Report, are summarized as follows: 51
51 See Voting Report 18.
34 K&E 19103759 Class Percent of Number of Claims/Interests Accepting Percent of Amount of Claims/Interests Accepting Fixed/Floating Plan Class FF3A 100% 100% Class FF3B 100% 100% Class FF4 100% 100% Class FF5 99% 99% Anaheim Plan Class A3 100% 100% Class A4 100% 100% Class A5A 100% 100% Ontario Plan Class O3 100% 100% Class O4 93% 99.98% Remaining Debtor Plan Class R3A 100% 100% Class R3B 100% 100% Class R3C 100% 100% Class R3D 100% 100% Class R3E 100% 100% Class R4A 98% 99.5% Class R4B 33% 11% Class R8 95% 96% Class R9 100% 100% Class R11 100% 100%
76. As set forth in the Voting Report, the Plan provides for 22 Voting Classes (as defined herein), although the Debtors Notice and Claims Agent only received ballots for 19 of the 22 Voting Classes. Of those 19 classes that voted for the Joint Plans, 18 voted overwhelmingly to accept the Plan. In addition, the three non-vacant classes (Classes A1, A2, and R12) eligible to vote but that did not return ballots are treated as if all holders of claims in
35 K&E 19103759 those classes had voted to accept the Plan. 52 As a result, 21 of 22 classes have voted to accept the Plan. 77. Although not every impaired voting class has accepted the Plan, the Plan may still be confirmed because the Debtors have satisfied the cramdown requirements under section 1129(b) of the Bankruptcy Code with respect to the impaired classes that voted or were deemed to reject the Plan. Argument I. The Debtors Satisfy Each Requirement for Confirmation by a Preponderance of the Evidence. 78. To confirm the Plan, the Court must find that a plan proponent has satisfied the provisions of section 1129 of the Bankruptcy Code by a preponderance of the evidence. 53 As set forth herein, the Plan fully complies with all of the requirements of sections 1122, 1123, and 1129 of the Bankruptcy Code. The following sections address each requirement individually, as well as the permissive elements of the Plan. A. The Plan Complies with Section 1129(a)(1) of the Bankruptcy Code. 79. Section 1129(a)(1) of the Bankruptcy Code requires that a plan of reorganization comply with the applicable provisions of the Bankruptcy Code, including, principally, rules governing classification of claims and interests and the contents of a plan of reorganization. 54
52 See Disclosure Statement Order, Ex. 2 3.q. 53 See JPMorgan Chase Bank, N.A. v. Charter Commcns Operating, LLC (In re Charter Commcns), 419 B.R. 221, 243 (Bankr. S.D.N.Y. 2009) (holding that Charter, as the plan proponent, bears the burden of establishing compliance with the factors set forth in section 1129 by a preponderance of the evidence); In re Young Broad. Inc., 430 B.R. 99, 128 (Bankr. S.D.N.Y. 2010) (same); see also Heartland Fed. Sav. & Loan Assoc. v. Briscoe Enters. , Ltd., II (In re Briscoe Enters., Ltd. II), 994 F.2d 1160, 1165 (5th Cir. 1993) (The combination of legislative silence, Supreme Court holdings, and the structure of the Code leads this Court to conclude that preponderance of the evidence is the debtors appropriate standard of proof both under 1129(a) and in a cramdown.). 54 11 U.S.C. 1129(a)(1); see also Kane v. Johns-Manville Corp., 843 F.2d 636, 648-49 (2d Cir. 1988) (suggesting that Congress intended the phrase applicable provisions in this subsection to mean provisions of Chapter 11 . . . such as section 1122 and 1123); In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723, 757
36 K&E 19103759 Accordingly, determining whether the Plan complies with section 1129(a)(1) requires application of sections 1122 and 1123 of the Bankruptcy Code. As explained below, the Plan complies with sections 1122 and 1123 in all respects. 1. The Plan Satisfies the Classification Requirements of Section 1122. 80. The Plan satisfies section 1122s classification requirements because each class differs from the others in a legal or factual nature or based on other relevant criteria. The Second Circuit has recognized that section 1122 of the Bankruptcy Code grants plan proponents significant flexibility in placing similar claims into different classes, provided that a rational basis exists for doing so. 55 Courts have identified several grounds justifying the separate classification of claims, including: (a) where members of a class possess different legal rights; 56
and (b) where the debtors have valid business reasons for separate classification. 57 In this case, the four Joint Plans that constitute the Plan provide for the separate classification of claims and
(Bankr. S.D.N.Y. 1992) (noting that [t]he legislative history of 1129(a)(1) explains that this provision embodies the requirements of 1122 and 1123, respectively, governing classification of claims and the contents of the Plan); S. Rep. No. 989, 95th Cong., 2d Sess. 126 (1978); H.R. Rep. No. 595, 95th Cong., lst Sess. 412 (1977). 55 See Boston Post Rd. L.P. v. FDIC (In re Boston Post Rd, L.P.), 21 F.3d 477, 483 (2d Cir. 1994) (finding that courts cannot prohibit separate classification of equal priority claims); Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 956-57 (2d Cir. 1993) (finding separate classification appropriate because classification scheme had a rational basis; separate classification based on bankruptcy court-approved settlement); In re 500 Fifth Ave. Assocs., 148 B.R. 1010, 1018 (Bankr. S.D.N.Y. 1993) (finding that the proponent of a plan of reorganization has considerable discretion to classify claims and interests according to the facts and circumstances of the case . . . .); Drexel, 138 B.R. at 757 (Courts have found that the Bankruptcy Code only prohibits the identical classification of dissimilar claims. It does not require that similar classes be grouped together . . . .); In re Ionosphere Clubs, Inc., 98 B.R. 174, 17778 (Bankr. S.D.N.Y. 1989) (a debtor may place claimants of the same rank in different classes and thereby provide different treatment for each respective class). 56 See Drexel, 138 B.R. at 715. 57 See Aetna Cas. and Sur. Co. v. Clerk, U.S. Bankr. Ct., New York, N.Y. (In re Chateaugay Corp.), 89 F.3d 942, 949 (2d Cir. 1996) (finding that separate classification of similarly situated claims is appropriate where supported by credible proof to justify separate classification of unsecured claims); In re Bally Total Fitness of Greater N.Y., Inc., Case No. 07-12395, 2007 WL 2779438, at *3 (Bankr. S.D.N.Y. Sept. 17, 2007) (same).
37 K&E 19103759 interests into the following classes based upon differences in the legal nature, priority, and business interests of such claims and interests. 58
Class identification for the Fixed/Floating Debtors: Class FF1 (Other Priority Claims Against Fixed/Floating Debtors). Claims against any of the Fixed/Floating Debtors that are entitled to priority in right of payment under section 507 of the Bankruptcy Code, other than: (a) Administrative Claims or (b) Priority Tax Claims. Class FF2 (Other Secured Claims Against Fixed/Floating Debtors). Secured Claims against any of the Fixed/Floating Debtors that are not: (a) Five Mile DIP Claims; (b) Lehman DIP Claims; (c) Anaheim Hotel Mortgage Loan Claims; (d) Fixed Rate Pool Mortgage Loan Claims; (e) Floating Rate Pool Mortgage Loan Claims; (f) Garden Grove Hotel Mortgage Loan Claims; (g) Ontario Hotel Mortgage Loan Claims; (h) San Antonio Hotel Mortgage Loan Claims; (i) San Diego Grove Hotel Mortgage Loan Claims; (j) Tysons Corner Hotel Mortgage Loan Claims; (k) Washington DC Hotel Mortgage Loan Claims; or (l) Anaheim Hotel Mezzanine Loan Claims. Class FF3A (Secured Fixed Rate Pool Mortgage Loan Claims Against Fixed/Floating Debtors). Secured Claims against the Fixed/Floating Debtors arising under, derived from, or based upon the Fixed Rate Pool Mortgage Loan Agreement. Class FF3B (Secured Floating Rate Pool Mortgage Loan Claims Against Fixed/Floating Debtors). Secured Claims against the Fixed/Floating Debtors arising under, derived from, or based upon the Floating Rate Pool Mortgage Loan Agreement. Class FF4 (Secured Floating Rate Pool Mezzanine Loan Claims Against Fixed/Floating Debtors). Secured Claims against the Fixed/Floating Debtors arising under, derived from, or based upon the Floating Rate Pool Mezzanine Loan Agreement. Class FF5 (General Unsecured Claims Against Fixed/Floating Debtors). Any Claims against the Fixed/Floating Debtors that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel
58 As set forth in Article III.A.1-A.4 of the Plan, the classifications of claims and interests set forth in Classes FF1-FF9 apply to each Fixed/Floating Debtor (as applicable), the classifications of claims and interests set forth in Classes A1A8 apply to each Anaheim Hotel Debtor (as applicable), the classifications of claims and interests set forth in Classes O1O8 apply to each Ontario Hotel Debtor (as applicable), and the classifications of claims and interests set forth in Classes R1R12 apply to each Remaining Debtor (as applicable).
38 K&E 19103759 Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims, (g) Intercompany Claims; or (h) Section 510(b) Claims. Class FF6 (Mortgage or Mezzanine Loan Deficiency Claims Against Fixed/Floating Debtors). Any Claims against the Fixed/Floating Debtors that are: (a) Fixed Rate Pool Mortgage Loan Claims that are not Secured, (b) Floating Rate Pool Mezzanine Loan Claims that are not Secured, or (c) Floating Rate Pool Mortgage Loan Claims that are not Secured. Class FF7 (Intercompany Claims Against Fixed/Floating Debtors). Any Claims held by a Debtor against a Fixed/Floating Debtor other than Claims based on a Postpetition Intercompany Loan. Class FF8 (Section 510(b) Claims Against Fixed/Floating Debtors). Any Claims against a Fixed/Floating Debtor arising from rescission of a purchase or sale of a Security of a Fixed/Floating Debtor or an affiliate (as defined in section 101(2) of the Bankruptcy Code) of a Fixed/Floating Debtor, which Security is not an Interest, for damages arising from the purchase or sale of such a Security, or for reimbursement or contribution allowed under section 502 of the Bankruptcy Code on account of such Claims. Class FF9 (Interests in Fixed/Floating Debtors). The common stock or shares, limited liability company interests, limited partnership units, preferred interests, and any other equity, ownership or profits interests of a Fixed/Floating Debtor or non-Debtor subsidiary of a Fixed/Floating Debtor and options, warrants, rights or other securities or agreements to acquire the common stock or shares, limited liability company interests, or other equity, ownership or profits interests of a Fixed/Floating Debtor or non-Debtor subsidiary of a Fixed/Floating Debtor (whether or not arising under or in connection with any employment agreement), including any Claim against a Fixed/Floating Debtor subject to subordination pursuant to section 510(b) of the Bankruptcy Code arising from or related to any of the foregoing. Class identification for the Anaheim Hotel Debtors: Class A1 (Other Priority Claims against Anaheim Hotel Debtors). Claims against any of the Anaheim Hotel Debtors that are entitled to priority in right of payment under section 507 of the Bankruptcy Code, other than: (a) Administrative Claims or (b) Priority Tax Claims. Class A2 (Other Secured Claims against Anaheim Hotel Debtors). Secured Claims against any of the Anaheim Hotel Debtors that are not: (a) Five Mile DIP Claims; (b) Lehman DIP Claims; (c) Anaheim Hotel Mortgage Loan Claims; (d) Fixed Rate Pool Mortgage Loan Claims; (e) Floating Rate Pool Mortgage Loan Claims; (f) Garden Grove Hotel Mortgage Loan Claims; (g) Ontario Hotel Mortgage Loan Claims; (h) San Antonio Hotel Mortgage Loan Claims; (i) San Diego Grove Hotel Mortgage Loan Claims; (j) Tysons Corner Hotel Mortgage
39 K&E 19103759 Loan Claims; (k) Washington DC Hotel Mortgage Loan Claims; or (l) Anaheim Hotel Mezzanine Loan Claims. Class A3 (Secured Anaheim Hotel Mortgage Loan Claims). All Secured Claims against the Anaheim Hotel Debtors arising under, derived from, or based upon the Anaheim Hotel Mortgage Loan Agreement. Class A4 (Secured Anaheim Hotel Mezzanine Loan Claims). All Secured Claims against the Anaheim Hotel Debtors arising under, derived from, or based upon the Anaheim Hotel Mezzanine Loan Agreement. Class A5A (General Unsecured Claims against Anaheim Hotel Owner or Anaheim Hotel Lessee). Any Claims against Anaheim Hotel Owner or Anaheim Hotel Lessee that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims, (g) Intercompany Claims; or (h) Section 510(b) Claims. Class A5B (General Unsecured Claims against Anaheim Mezzanine Debtor). Any Claims against the Anaheim Mezzanine Debtor that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims; (g) Intercompany Claims; or (h) Section 510(b) Claims. Class A6 (Anaheim Hotel Mezzanine Loan Deficiency Claims against Anaheim Hotel Debtors). Any Anaheim Hotel Mezzanine Loan Claims against the Anaheim Hotel Debtors that are not Secured. Class A7 (Intercompany Claims against Anaheim Hotel Debtors). Any Claims held by a Debtor against an Anaheim Hotel Debtor other than Claims based on a Postpetition Intercompany Loan. Class A8 (Intercompany Interests in Anaheim Hotel Debtors). Any Interest held by a Debtor in an Anaheim Hotel Debtor and any Interest held by a Debtor in a non-Debtor affiliate of an Anaheim Hotel Debtor. Class identification for the Ontario Hotel Debtors: Class O1 (Other Priority Claims against Ontario Hotel Debtors). Claims against any of the Ontario Hotel Debtors that are entitled to priority in right of payment under section 507 of the Bankruptcy Code, other than: (a) Administrative Claims or (b) Priority Tax Claims. Class O2 (Other Secured Claims Ontario Hotel Debtors). Secured Claims against any of the Ontario Hotel Debtors that are not: (a) Five Mile DIP Claims;
40 K&E 19103759 (b) Lehman DIP Claims; (c) Anaheim Hotel Mortgage Loan Claims; (d) Fixed Rate Pool Mortgage Loan Claims; (e) Floating Rate Pool Mortgage Loan Claims; (f) Garden Grove Hotel Mortgage Loan Claims; (g) Ontario Hotel Mortgage Loan Claims; (h) San Antonio Hotel Mortgage Loan Claims; (i) San Diego Grove Hotel Mortgage Loan Claims; (j) Tysons Corner Hotel Mortgage Loan Claims; (k) Washington DC Hotel Mortgage Loan Claims; or (l) Anaheim Hotel Mezzanine Loan Claims. Class O3 (Secured Ontario Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the Ontario Hotel Mortgage Loan Agreement. Class O4 (General Unsecured Claims against Ontario Hotel Debtors). Any Claims against the Ontario Hotel Debtors that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims; (g) Intercompany Claims; or (h) Section 510(b) Claims. Class O5 (Ontario Hotel Mortgage Loan Deficiency Claims). Any Ontario Hotel Mortgage Loan Claim that is not Secured. Class O6 (Intercompany Claims against Ontario Hotel Debtors). Any Claims held by a Debtor against an Ontario Hotel Debtor other than Claims based on a Postpetition Intercompany Loan. Class O7 (Section 510(b) Claims against Ontario Hotel Debtors). Any Claims against an Ontario Hotel Debtor arising from rescission of a purchase or sale of a Security of an Ontario Hotel Debtor or an affiliate (as defined in section 101(2) of the Bankruptcy Code) of an Ontario Hotel Debtor, which Security is not an Interest, for damages arising from the purchase or sale of such a Security, or for reimbursement or contribution allowed under section 502 of the Bankruptcy Code on account of such Claims. Class O8 (Intercompany Interests in Ontario Hotel Debtors). Any Interest held by a Debtor in an Ontario Hotel Debtor and any Interest held by a Debtor in a non-Debtor affiliate of an Ontario Hotel Debtor. Class identification for the Remaining Debtors: Class R1 (Other Priority Claims against the Remaining Debtors). Claims against any of the Remaining Debtors that are entitled to priority in right of payment under section 507 of the Bankruptcy Code, other than: (a) Administrative Claims or (b) Priority Tax Claims. Class R2 (Other Secured Claims against the Remaining Debtors). Secured Claims against any of the Remaining Debtors that are not: (a) Five Mile DIP
41 K&E 19103759 Claims; (b) Lehman DIP Claims; (c) Anaheim Hotel Mortgage Loan Claims; (d) Fixed Rate Pool Mortgage Loan Claims; (e) Floating Rate Pool Mortgage Loan Claims; (f) Garden Grove Hotel Mortgage Loan Claims; (g) Ontario Hotel Mortgage Loan Claims; (h) San Antonio Hotel Mortgage Loan Claims; (i) San Diego Grove Hotel Mortgage Loan Claims; (j) Tysons Corner Hotel Mortgage Loan Claims; (k) Washington DC Hotel Mortgage Loan Claims; or (l) Anaheim Hotel Mezzanine Loan Claims. Class R3A (Secured Garden Grove Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the Garden Grove Hotel Mortgage Loan Agreement. Class R3B (Secured San Diego Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the San Diego Hotel Mortgage Loan Agreement. Class R3C (Secured Washington DC Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the Washington DC Hotel Mortgage Loan Agreement. Class R3D (Secured Tysons Corner Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the Tysons Corner Hotel Mortgage Loan Agreement, including any guarantees provided by any of the Debtors in connection therewith. Class R3E (Secured San Antonio Hotel Mortgage Loan Claims). All Secured Claims arising under, derived from, or based upon the San Antonio Hotel Mortgage Loan Agreement. Class R4A (General Unsecured Claims against the Remaining Debtors Other than Grand Prix Holdings). Any Claims against the Remaining Debtors, other than Grand Prix Holdings, that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims, (g) Intercompany Claims; or (h) Section 510(b) Claims. Class R4B (General Unsecured Claims against Grand Prix Holdings). Any Claims against Grand Prix Holdings that are not Secured and that are not: (a) Administrative Claims; (b) Priority Tax Claims; (c) Other Priority Claims; (d) Mortgage or Mezzanine Loan Deficiency Claims; (e) Anaheim Hotel Mezzanine Loan Deficiency Claims; (f) Ontario Hotel Mortgage Loan Deficiency Claims; (g) Intercompany Claims; or (h) Section 510(b) Claims. Class R5 (Intercompany Claims against the Remaining Debtors). Any Claims held by a Debtor against a Remaining Debtor other than Claims based on a Postpetition Intercompany Loan.
42 K&E 19103759 Class R6 (Intercompany Interests in the Remaining Debtors). Any Interest held by a Debtor in a Remaining Debtor and any Interest held by a Debtor in a non-Debtor affiliate of a Remaining Debtor. Class R7 (Innkeepers USA LP Preferred D Interests). Class D preferred limited partnership units in Remaining Debtor Innkeepers USA Limited Partnership. Class R8 (Innkeepers USA Trust Preferred C Interests). 8% Series C cumulative preferred shares in Debtor Innkeepers USA Trust. Class R9 (Innkeepers USA Trust Preferred A Interests). 12% Series A cumulative preferred shares in Remaining Debtor Innkeepers USA Trust. Class R10 (Innkeepers USA Trust Common Interests). Common shares of Remaining Debtor Innkeepers USA Trust that are not Intercompany Interests. Class R11 (Grand Prix Holdings Interests). Common and preferred interests in Remaining Debtor Grand Prix Holdings. Class R12 (Section 510(b) Claims against the Remaining Debtors). Any Claims against a Remaining Debtor arising from rescission of a purchase or sale of a Security of a Remaining Debtor or an affiliate (as defined in section 101(2) of the Bankruptcy Code) of a Remaining Debtor, which Security is not an Interest, for damages arising from the purchase or sale of such a Security, or for reimbursement or contribution allowed under section 502 of the Bankruptcy Code on account of such Claims. 81. The Plans classification scheme reflects the Debtors capital structure. Valid business, factual, and legal reasons exist for classifying separately the various classes of claims and interests created under the Plan. Indeed, for each Debtor and each group of Debtors, secured claims are classified separately from unsecured claims and are further divided into separate classes according to the relative priority of such secured and unsecured claims. For example, General Unsecured Claims against Fixed/Floating Debtors are classified separately from Secured Fixed Rate Pool Mortgage Claims against Fixed/Floating Debtors, which are in turn classified separately from interests in Fixed/Floating Debtors and Intercompany Claims against
43 K&E 19103759 Fixed/Floating Debtors. 59 Thus, in each instance, the Plan classifies claims based upon their different rights and attributes. Additionally, each of the claims or interests in each particular class is substantially similar to the other claims or interests in such class. 82. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1122 of the Bankruptcy Code. Accordingly, the Debtors respectfully submit that the Plan satisfies the classification requirements of section 1122 of the Bankruptcy Code. 2. The Plan Satisfies the Mandatory Requirements of Section 1123(a). 83. The Plan meets the seven mandatory requirements of section 1123(a) because: (1) the Plan designates classes of claims and interests; (2) the Plan identifies unimpaired classes of claims and interests; (3) the Plan specifies treatment of impaired classes of claims and interests; (4) the Plan provides the same treatment for each claim or interest of a particular class, unless the holder of a particular claim agrees to a less favorable treatment of such particular claim or interest; (5) the Plan provides adequate means for its implementation; (6) the Plan provides for the prohibition of nonvoting equity securities and provides an appropriate distribution of voting power among the classes of securities; and (7) the Plan is consistent with the interests of the creditors and equity security holders and with public policy with respect to the manner of selection of the reorganized companys officers and directors. 60
84. Article III of the Plan satisfies the first four requirements of section 1123(a) by: (a) designating classes of claims and interests, as required by section 1123(a)(1) of the Bankruptcy Code; (b) specifying the classes of claims and interests that are unimpaired under the Plan, as required by section 1123(a)(2) of the Bankruptcy Code; (c) specifying the treatment of
59 See Plan, Art. III. 60 See 11 U.S.C. 1123(a)(1)-(7).
44 K&E 19103759 each class of claims and interests that is impaired, as required by section 1123(a)(3) of the Bankruptcy Code; and (d) specifying that the treatment of each claim or interest within a class is the same, unless the holder of a claim consents to less favorable treatment on account of its claim or interest. 85. One East alleges the Plan violates section 1123(a)(4) because the Ad Hoc Committee Agreement provides for a distribution to members of the Ad Hoc Committee beyond what other holders of Innkeepers USA Trust Preferred C Interests will receive. 61 One Easts objection is not persuasive because it misunderstands the structure of the Plan and the nature of its distributions. The members of the Ad Hoc Committee are receiving the same distributions on account of their Innkeepers USA Trust Preferred C Interests as all other interestholders in Class R8. The Ad Hoc Committee Agreement separately provides for the payment of funds as compensation to the Ad Hoc Committee and its counsel for the efforts that the Ad Hoc Committee and its counsel expended for the benefit of the Debtors estates. Any funds received by Ad Hoc Committee members pursuant to the Ad Hoc Committee Agreement are not on account of their holding Innkeepers USA Trust Preferred C Interests, but rather are on account of the efforts expended and value created by the members of the Ad Hoc Committee during the Chapter 11 Cases. The Bankruptcy Code provides ample justification for the Ad Hoc Committee Agreement under these circumstances, 62 and, therefore, the Plan does not violate section 1123(a)(4).
61 One East Objection at 50. 62 See Argument Section II.E herein.
45 K&E 19103759 86. Article IV and various other provisions of the Plan provide adequate means for the Plans implementation, thus satisfying the fifth section of 1123(a). 63 Article III.6 of the New HoldCo limited liability company agreement does not provide for non-voting securities and otherwise provides for an appropriate distribution of voting power. 64 Finally, Article IV.W of the Plan satisfies the seventh element of section 1123(a) because the procedures for selecting officers and directors of the New HoldCo Board, as provided for in the form of the New HoldCo limited liability company agreement, 65 are consistent with the interests of creditors and equity security holders and with public policy. In light of the foregoing, the Debtors respectfully submit that the Plan satisfies section 1123(a) of the Bankruptcy Code. B. The Debtors Have Complied with the Applicable Provisions of the Bankruptcy Code (Section 1129(a)(2)). 87. The Debtors have satisfied section 1129(a)(2) of the Bankruptcy Code, which requires that the proponent of a plan of reorganization comply with the applicable provisions of the Bankruptcy Code. The legislative history to section 1129(a)(2) provides that section 1129(a)(2) is intended to encompass the disclosure and solicitation requirements set forth in sections 1125 and 1126 of the Bankruptcy Code. 66 As set forth below, the Debtors have complied with these provisions, including sections 1125 and 1126, as well as Bankruptcy Rules
63 11 U.S.C. 1123(a)(5). Section 1123(a)(5) specifies that adequate means for implementation of a plan may include: (i) retention by the debtor of all or part of its property; (ii) the transfer of property of the estate to one or more entities; (iii) cancellation or modification of any indenture; (iv) curing or waiving of any default; (v) amendment of the debtors charter; or (vi) issuance of securities for cash, for property, for existing securities, in exchange for claims or interests or for any other appropriate purpose. 64 See Plan Supplement, Ex. I, Art. III.6. 65 See Plan Supplement, Ex. I, Art. III.3. 66 See In re Johns-Manville Corp., 68 B.R. 618, 630 (Bankr. S.D.N.Y. 1986), affd in part, revd in part on other grounds, 78 B.R. 407 (S.D.N.Y. 1987), affd, 843 F.2d 636 (2d Cir. 1988); In re Toy & Sports Warehouse, Inc., 37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984); see also H.R. Rep. No. 95-595, at 412; S. Rep. No. 95-989, at 126 (Paragraph (2) [of section 1129(a)] requires that the proponent of the plan comply with the applicable provisions of chapter 11, such as section 1125 regarding disclosure.).
46 K&E 19103759 3017 and 3018, by distributing the Disclosure Statement and soliciting acceptances of the Plan through their solicitation agent in accordance with the Disclosure Statement Order. 1. The Debtors Have Complied with the Disclosure and Solicitation Requirements of Section 1125. 88. Section 1125 of the Bankruptcy Code prohibits the solicitation of acceptances or rejections of a plan of reorganization unless, at the time of or before such solicitation, there is transmitted the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. 67 Section 1125 ensures that parties in interest are fully informed regarding the condition of the debtor so that they may make an informed decision whether to approve or reject the plan. 68
89. Here, the Debtors have satisfied section 1125 of the Bankruptcy Code. Prior to soliciting votes on the Plan, the Court entered the Disclosure Statement Order approving the Disclosure Statement as containing adequate information pursuant to section 1125(a)(1). 69 The Disclosure Statement Order also approved the contents of the Solicitation Packages provided to holders of claims and interests entitled to vote on the Plan, the non-voting materials provided to creditors not entitled to vote on the Plan, and the relevant dates for voting and objecting to the Plan. 70 The Debtors, through their Notice and Claims Agent, complied in all respects with the content and delivery requirements of the Disclosure Statement Order thereby satisfying sections 1125(a) and (b) of the Bankruptcy Code. 71 The Debtors also satisfied section 1125(c) of
67 11 U.S.C. 1125(b). 68 See Momentum Mfg. Corp. v. Emp. Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir. 1994) (finding that section 1125 of the Bankruptcy Code obliges a Debtor to engage in full and fair disclosure that would enable a hypothetical reasonable investor to make an informed judgment about the plan). 69 See Disclosure Statement Order 4. 70 Id. 5-25. 71 See generally solicitation affidavits [Docket Nos. 1520, 1650, 1651, 1681, and 1684] (collectively, the Solicitation Affidavits) and the Voting Report.
47 K&E 19103759 the Bankruptcy Code, which provides that the same disclosure statement must be transmitted to each holder of a claim or interest in a particular Class. Here, the Debtors transmitted the same Disclosure Statement to all parties entitled to vote on the Plan. 72 In addition, the Debtors have solicited votes on the Plan in good faith in accordance with section 1125(e) of the Bankruptcy Code. The Debtors are not aware of any dispute as to their compliance with the disclosure and solicitation requirements of section 1125 of the Bankruptcy Code. 90. To resolve a number of Plan objections, the Debtors have immaterially modified the Plan. Contemporaneously with the filing of this brief, the Debtors are filing and serving on the Bankruptcy Rule 2002 notice list and all Plan objectors a blackline version of the Plan highlighting changes to the version of the Plan distributed with the Disclosure Statement and solicitation materials. As the Debtors continue to work toward resolving objections, certain additional modifications may be referenced on the record during the Confirmation Hearing. 91. Section 1127 of the Bankruptcy Code provides for the modification of a chapter 11 plan by its proponent at any time before confirmation, as long as the plan as modified satisfies the requirements of sections 1122 and 1123 of the Bankruptcy Code. 73 In addition, the proposed modification must comply with the disclosure requirements as set forth in section 1125 of the Bankruptcy Code. 74 As this district has noted, however, such disclosure requirements do not necessarily mandate re-solicitation of the plan. 75 Indeed, further disclosure is only necessary
72 Id. 73 In re Cellular Info. Sys., Inc., 171 B.R. 926, 929 n.6 (Bankr. S.D.N.Y. 1994); Enron Corp. v. New Power Co., (In re New Power Co.), 438 F.3d 1113, 1117 (11th Cir. 2006). 74 11 U.S.C. 1127(c). 75 See In re Cellular Info. Sys., 171 B.R. at 929 n.6 (I find that such changes are nonmaterial modifications which do not require re-solicitation of the respective impaired classes of creditors and equity security holders).
48 K&E 19103759 when the proposed modification materially and adversely impacts a claimants treatment. 76 The Debtors submit that no modifications to the Plan require resolicitation because they address individual concerns raised by particular holders of claims or interests and do not adversely affect the treatment of those holders who voted to accept the Plan.
2. The Debtors Have Satisfied the Plan Acceptance Requirements of Section 1126. 92. Section 1126 of the Bankruptcy Code provides that only holders of allowed claims and equity interests in impaired classes that will receive or retain property under a plan on account of such claims or equity interests may vote to accept or reject a plan. 77 As set forth in the Plan, the Disclosure Statement, the Disclosure Statement Order, and the Voting Report, in accordance with section 1126, the Debtors did not solicit votes on the Plan from the following classes. 93. Classes FF1, FF2, O1, O2, R1, R2, and R6 are unimpaired under the Plan (collectively, the Unimpaired Classes). 78 Pursuant to section 1126(f) of the Bankruptcy Code, holders of claims in the Unimpaired Classes are conclusively presumed to have accepted the Plan; therefore, they are not entitled to vote on the Plan. 94. Classes FF6, FF7, FF8, FF9, A5B, A6, A7, A8, O5, O6, O7, O8, R5, R7, and R10 are impaired under the Plan and will not receive any distributions or retain any property under the Plan (collectively, the Deemed Rejecting Classes). 79 Pursuant to section 1126(g) of the
76 See Resol. Trust Corp. v. Best Prods. Co., Inc., 177 B.R. 791, 802 (S.D.N.Y. 1995) (noting that the key inquiry was whether the modification materially altered the plan so that a claimants treatment was adversely affected); In re New Power, 438 F.3d at 1118 ([A]s an initial matter, we consider whether there was any material and adverse modifications from the First Amended Plan.). 77 See 11 U.S.C. 1126. 78 See Plan, Art. III. 79 See id.
49 K&E 19103759 Bankruptcy Code, holders of claims and interests in the Deemed Rejecting Classes are deemed to have rejected the Plan; therefore, they are not entitled to vote on the Plan. 95. Accordingly, the Debtors solicited votes from holders of allowed claims in Classes FF3A, FF3B, FF4, FF5, A1, A2, A3, A4, A5A, O3, O4, R3A, R3B, R3C, R3D, R3E, R4A, R4B, R8, R9, R11, and R12 because each of these classes is impaired and entitled to receive a distribution under the Plan (collectively, the Voting Classes). 80 With respect to the Voting Classes, section 1126(c) of the Bankruptcy Code specifies the requirements for acceptance of a plan by a class of claims: A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of [section 1126], that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of [section 1126], that have accepted or rejected such plan. 81
96. Section 1126(d) of the Bankruptcy Code specifies the requirements for acceptance of a plan by a class of interests: A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of [section 1126], that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of [section 1126], that have accepted or rejected such plan. 82
97. The Voting Report, as previously summarized, reflects the results of the voting process in accordance with section 1126 of the Bankruptcy Code. 83 As set forth in the Voting Report, the Joint Plans have been accepted by 21 of the 22 Voting Classes entitled to vote
80 See Plan, Art. III; Disclosure Statement Order, Ex. A C; see generally Solicitation Affidavits. 81 11 U.S.C. 1126(c). 82 11 U.S.C. 1126(d). 83 See Voting Report 14.
50 K&E 19103759 and for which ballots were returned. The Debtors are not aware of any dispute as to their compliance with section 1126 of the Bankruptcy Code. C. The Plan Has Been Proposed in Good Faith and Not by Any Means Forbidden by Law (Section 1129(a)(3)). 98. Section 1129(a)(3) of the Bankruptcy Code requires that a plan of reorganization be proposed in good faith and not by any means forbidden by law. 84 Good faith requires that a plan must be proposed with honest intentions and a sound basis for expecting that a restructuring can be achieved. 85 Chapter 11s fundamental purpose is to enable a distressed business to reorganize its affairs and maximize creditor recoveries. 86 Thus, a plan is proposed in good faith if there is a likelihood that the plan will achieve a result consistent with these goals. 87
Where the plan is proposed with the legitimate purpose of reorganizing and has a reasonable chance of success, the good faith requirement of section 1129(a)(3) is generally satisfied. 88
99. The Debtors negotiated, drafted, and implemented their proposed restructuring in good faith. As noted above, the Debtors designed and implemented plan development and marketing processes designed to encourage participation and interest from as many financial and strategic parties as possible to serve as plan sponsors. Subsequently, the Debtors market tested
84 11 U.S.C. 1129(a)(3). 85 Johns-Manville, 843 F.2d at 649 (quoting Koelbl v. Glessing (In re Koelbl), 751 F.2d 137, 139 (2d Cir. 1984)); see also In re SGL Carbon Corp., 200 F.3d 154, 165 (3d Cir. 1999) (finding good faith requires some relation between the chapter 11 plan and the reorganization-related purposes of chapter 11). 86 See Bank of Am. Natl Trust & Sav. Assn v. 203 N. LaSalle St. Pship, 526 U.S. 434, 453 (1999) (basic purposes of chapter 11 are preserving going concerns and maximizing property available to satisfy creditors.). 87 See In re Granite Broad. Corp., 369 B.R. 120, 137 (Bankr. S.D.N.Y. 2007) (reviewing the plan to determine whether such plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code). 88 See In re Source Enters., Inc., Case No. 06-11707, 2007 WL 2903954, at *6 (Bankr. S.D.N.Y. Oct. 1, 2007) (finding that good faith requirement satisfied when plan filed with legitimate and honest purposes of maximizing value of the estate and effectuating equitable distribution); Bally Total Fitness, 2007 WL 2779438, at *5 (finding that good faith requirement satisfied when the plan was proposed with legitimate and honest purpose of reorganizing the debtor).
51 K&E 19103759 their stalking horse proposal at an auction, subject to a broad fiduciary out to ensure the integrity of the process. The Debtors have continued to engage with their various constituencies throughout the Chapter 11 Cases to ensure that they have explored all potential avenues to value maximization. As a result of these exhaustive procedures and efforts by the Debtors and their professionals, the Debtors submit that the Plan has been proposed honestly and with a sound basis for expecting that the proposed restructuring can be achieved. Consequently, the Debtors believe that the Plan has been proposed in good faith and satisfies all of the requirements of section 1129(a)(3) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan has been proposed in good faith. D. The Plan Provides for Bankruptcy Court Approval of Certain Administrative Payments (Section 1129(a)(4)). 100. Section 1129(a)(4) of the Bankruptcy Code requires that certain professional fees and expenses paid by the plan proponent, by the debtor, or by a person issuing securities or acquiring property under the Plan, be subject to approval of the Court as reasonable. 89
101. Here, all payments made or to be made by the Debtors for services or for costs or expenses in connection with these Chapter 11 Cases prior to the Effective Date, including all Accrued Professional Compensation Claims, have been approved by, or are subject to approval of the Court as reasonable. Specifically, the Plan provides for the payment of only Allowed Accrued Professional Compensation Claims. 90 In addition, Article II.B of the Plan provides that all final requests for payment of Accrued Professional Compensation Claims shall be filed no later than 60 days after the Effective Date for determination by the Court, after notice and a hearing, in accordance with the procedures established by the Bankruptcy Code and prior Court
89 See, e.g., In re WorldCom, 2003 WL 23861928, at *54 (Bankr. S.D.N.Y. Oct. 31, 2003); Drexel, 138 B.R. at 760. 90 See Plan, Art. II.B.
52 K&E 19103759 orders. 91 Because the Court will determine the Allowed amounts of such Accrued Professional Compensation Claims, the Plan complies fully with the requirements of section 1129(a)(4) of the Bankruptcy Code. 102. In addition, the Plan provides for the Ad Hoc Committee Payment, which was an integral part of the resolution embodied by the Plan and the four Joint Plans it comprises. 92 As described in more detail in Section II.D below, the Ad Hoc Committee Payment is reasonable. E. Post-Emergence Directors and Officers Will Be Disclosed Before the Effective Date and Their Appointment Is Consistent with Public Policy (Section 1129(a)(5)). 103. The Bankruptcy Code requires the proponent of a plan to disclose the identity and affiliation of any individual proposed to serve as a director or officer of the debtor or a successor to the debtor under the plan. 93 Section 1129(a)(5)(A)(ii) further requires that the appointment or continuance of such officers and directors be consistent with the interests of creditors and equity security holders and with public policy. 94
104. In this case, the Plan satisfies section 1129(a)(5)(A)(i) of the Bankruptcy Code because, to the extent known, the Debtors will have disclosed the identities and affiliations of all persons proposed to serve on the New HoldCo Board and as Trustee for the Liquidation Trust at or prior to the Effective Date. 95 Specifically, Article IV.W of the Plan provides that New HoldCo shall be managed in accordance with the New HoldCo limited liability company
91 Id. 92 As explained above, pursuant to the Ad Hoc Committee Agreement, the Ad Hoc Committee and its advisors will receive an Allowed Administrative Claim in the amount of $3.5 million, which amount shall be paid by a Remaining Debtor (other than Grand Prix Holdings, Innkeepers USA Trust, and Innkeepers Financial Corporation) on the Effective Date of the Remaining Debtor Plan. 93 11 U.S.C. 1129(a)(5)(A)(i). 94 11 U.S.C. 1129(a)(5)(A)(ii). 95 See Plan, Art. IV.Q, IV.Y.
53 K&E 19103759 agreement, the form of which is included in Exhibit H of the Plan Supplement. Article IV.Y of the Plan provides for a Liquidation Trust to oversee the Wind Down of the Remaining Debtors estates. 96 Accordingly, the Debtors will have satisfied the requirements of section 1129(a)(5) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1129(a)(5) of the Bankruptcy Code. F. The Plan Does Not Require Governmental Approval of Rate Changes (Section 1129(a)(6)). 105. Section 1129(a)(6) of the Bankruptcy Code permits confirmation only if any regulatory commission that will have jurisdiction over the debtor after confirmation has approved any rate change provided for in the plan. 97 The Plan does not provide for any rate changes and no party has argued otherwise. Section 1129(a)(6) of the Bankruptcy Code is inapplicable here. G. The Plan Is in the Best Interests of Creditors and Interest Holders (Section 1129(a)(7)). 106. Often called the best interests test, section 1129(a)(7) of the Bankruptcy Code requires that a chapter 11 plan provide, with respect to each class, that each holder of a claim or equity interest in such class either: (a) has accepted the plan; or (b) will receive or retain under the plan property of a value, as of the effective date of the plan, that is not less than the amount that such holder would receive or retain if the debtors liquidated under chapter 7 of the Bankruptcy Code. 98 The best interests test is generally satisfied by a liquidation analysis
96 See Plan, Art. IV.Y. Midland objected to the proposed Wind Down in the Plan. See Midland Objection 23-35. To address these concerns, the Debtors modified the Plan to implement a Liquidating Trust structure, which is commonplace in sales under section 363 of the Bankruptcy Code. The Plan, as amended, provides for the Debtors crisis manager, AP Services, LLC, which has been actively involved in the Debtors claims reconciliation process to date, to act as Trustee. 97 11 U.S.C. 1129(a)(6). 98 11 U.S.C. 1129(a)(7)(A).
54 K&E 19103759 demonstrating that an impaired class will receive no less under the plan than under a chapter 7 liquidation. 99
107. In this case, the Plan satisfies the best interests test with respect to all Classes of claims and interests. To demonstrate compliance with section 1129(a)(7) of the Bankruptcy Code, the Debtors have prepared a liquidation analysis estimating and comparing the range of proceeds generated under the Plan and a hypothetical chapter 7 liquidation (the Liquidation Analysis). 100 As reflected by the Liquidation Analysis, all impaired classes are projected to receive a recovery under the Plan greater than or equal to their recovery under a hypothetical chapter 7 liquidation. 108. The chart below compares the treatment of the Debtors creditors under the current Plan (as adjusted to account for the voting results) to a hypothetical chapter 7 liquidation. Class Claims and Interests Status Estimated Range of Allowed Claims / Interests Estimated % Range of Recoveries Under the Plan Estimated % Recovery Under Chapter 7 Fixed/Floating Debtors Plan Class FF3A Secured Fixed Rate Pool Mortgage Loan Claims Against Fixed/Floating Debtors Impaired $839,561,635 87.7% to 87.8% 68.3% to 83.3% Class FF3B Secured Floating Rate Pool Mortgage Loan Claims Against Fixed/Floating Debtors Impaired $218,504,023 $246,318,025 94.8% to 100% 82.1% to 99.8% Class FF4 Secured Floating Rate Pool Mezzanine Loan Claims Against Fixed/Floating Debtors Impaired $131,345,438 0% to 1.8% 0% Class FF5 General Unsecured Claims Against Fixed/Floating Debtors Impaired $4,775,484 $7,022,997 67.6% to 99.5% 0%
99 See In re Adelphia Commcns Corp., 368 B.R. 140, 251 (Bankr. S.D.N.Y. 2007) (holding that Section 1129(a)(7) was satisfied when impaired holder of claim would receive no less than such holder would receive in a hypothetical chapter 7 liquidation). 100 See Disclosure Statement, Ex. C.
55 K&E 19103759 Class Claims and Interests Status Estimated Range of Allowed Claims / Interests Estimated % Range of Recoveries Under the Plan Estimated % Recovery Under Chapter 7 Class FF6 Mortgage or Mezzanine Loan Deficiency Claims Against Fixed/Floating Debtors Impaired $216,959,309 $244,773,311 0% 0% Class FF7 Intercompany Claims Against Fixed/Floating Debtors Impaired Unliquidated 0% 0% Class FF8 Section 510(b) Claims Against Fixed/Floating Debtors Impaired $0 0% 0% Class FF9 Interests in Fixed/Floating Debtors Impaired N/A 0% 0% Anaheim Hotel Debtors Plan Class A1 Other Priority Claims against Anaheim Hotel Debtors Impaired $0 100% N/A Class A2 Other Secured Claims against Anaheim Hotel Debtors Impaired $0 100% N/A Class A3 Secured Anaheim Hotel Mortgage Loan Claims Impaired $13,172,577 100% N/A Class A4 Secured Anaheim Hotel Mezzanine Loan Claims Impaired $22,640,833 N/A 101
N/A Class A5A General Unsecured Claims against Anaheim Hotel Debtors or Anaheim Hotel Lessee Impaired $239,900$268,948 100% N/A Class A5B General Unsecured Claims against Anaheim Mezzanine Debtor Impaired $0 0% N/A Class A6 Anaheim Hotel Mezzanine Loan Deficiency Claims against Anaheim Hotel Debtors Impaired N/A 0% N/A Class A7 Intercompany Claims against Anaheim Hotel Debtors Impaired N/A 0% N/A Class A8 Intercompany Interests in Anaheim Hotel Debtors Impaired N/A 0% N/A Ontario Hotel Debtors Plan Class O3 Secured Ontario Hotel Mortgage Loan Claims Impaired $36,855,689 N/A 102 N/A Class O4 General Unsecured Claims against Ontario Hotel Debtors Impaired $326,858$495,202 6.06% to 9.18% N/A
101 Holders of claims in Class A4 will receive certain property rather than a dollar recovery. See Plan, Art. III. 102 Holders of claims in Class O3 will receive a deed in lieu of foreclosure or commensurate state foreclosure proceedings rather than receiving a dollar recovery. See Plan, Art. III.
56 K&E 19103759 Class Claims and Interests Status Estimated Range of Allowed Claims / Interests Estimated % Range of Recoveries Under the Plan Estimated % Recovery Under Chapter 7 Class O5 Ontario Hotel Mortgage Loan Deficiency Claims Impaired N/A 0% N/A Class O6 Intercompany Claims against Ontario Hotel Debtors Impaired N/A 0% N/A Class O7 Section 510(b) Claims against Ontario Hotel Debtors Impaired $0 0% N/A Class O8 Intercompany Interests in Ontario Hotel Debtors Impaired N/A 0% N/A Remaining Debtor Plan Class R3A Secured Garden Grove Hotel Mortgage Loan Claims Impaired $37,907,081 100% 75.5% to 91% Class R3B Secured San Diego Hotel Mortgage Loan Claims Impaired $47,787,118 100% 77.2% to 94.8% Class R3C Secured Washington DC Hotel Mortgage Loan Claims Impaired $25,919,415 100% 96.2% to 100.0% Class R3D Secured Tysons Corner Hotel Mortgage Loan Claims Impaired $25,514,424 100% 88.1% to 100.0% Class R3E Secured San Antonio Hotel Mortgage Loan Claims Impaired $24,501,947 100% 90.5% to 100.0% Class R4A General Unsecured Claims against the Remaining Debtors Other Than Grand Prix Holdings Impaired $651,327 $2,119,281 100% 51.7% to 100% Class R4B General Unsecured Claims against Grand Prix Holdings Impaired $0 0% to 3.0% 0% to 1.2% Class R5 Intercompany Claims against the Remaining Debtors Impaired N/A 0% 0% Class R7 Innkeepers USA LP Preferred D Interests Impaired $1,621,562 0% 0% Class R8 Innkeepers USA Trust Preferred C Interests Impaired $173,136,437 0% to 6.0% , 0% to 3.2% Class R9 Innkeepers USA Trust Preferred A Interests Impaired $115,812,294 0% to 6.0% 0% to 3.2% Class R10 Innkeepers USA Trust Common Interests Impaired N/A 0% 0% Class R11 Grand Prix Holdings Interests Impaired $0$6,800,000 N/A 0% Class R12 Section 510(b) Claims against the Remaining Debtors Impaired $0 0% 0%
109. As the chart demonstrates, holders of allowed claims in every impaired class are projected to recover as much or more under the Plan than they would receive in a chapter 7 liquidation. Based on these facts, the Debtors respectfully submit that the Plan satisfies the best
57 K&E 19103759 interests test under section 1129(a)(7) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan complies with section 1129(a)(7) of the Bankruptcy Code. H. The Plan Has Been Accepted By Multiple Impaired Classes (Section 1129(a)(8)). 110. Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims or interests must either accept a plan or be unimpaired under a plan. 103 Pursuant to section 1126(c) of the Bankruptcy Code, a class of impaired claims accepts a plan if holders of at least two-thirds in dollar amount and more than one-half in number of the claims in that class actually vote to accept the plan. 104 Pursuant to section 1126(d) of the Bankruptcy Code, a class of interests accepts a plan if holders of at least two-thirds in amount of the allowed interests in that class actually vote to accept the plan. 105 A class that is not impaired under a plan, and each holder of a claim or interest in such a class, is conclusively presumed to have accepted the plan. 106 A class is deemed to have rejected a plan if the plan provides that the claims or interests of that class do not receive or retain any property under the plan on account of such claims or interests. 107
111. Four of four Voting Classes for each applicable Debtor voted to accept the Fixed/Floating Plan; five of five Voting Classes for each applicable Debtor voted to accept the Anaheim Plan; three of three Voting Classes for each applicable Debtor voted to accept the Ontario Plan; and six of seven Voting Classes for each applicable Debtor voted to accept the
103 11 U.S.C. 1129(a)(8). 104 11 U.S.C. 1126(c) . 105 11 U.S.C. 1126(d) . 106 11 U.S.C. 1126(f); see SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 290 (2d Cir. 1992) (noting that an unimpaired class is presumed to have accepted the plan); see also S. Rep. No. 95-989 at 123 (Section 1126(f) of the Bankruptcy Code provides that no acceptances are required from any class whose claims or interests are unimpaired under the Plan or in the order confirming the Plan). 107 See 11 U.S.C. 1126(g).
58 K&E 19103759 Remaining Debtor Plan. 108 Although one class did not vote to accept the Remaining Debtor Plan, the Remaining Debtor Plan may be confirmed over the rejecting votes because the Debtors have satisfied the requirements for cramdown under section 1129(b). Thus, because every Voting Class either (a) voted to accept or will be deemed to accept the Plan, or (b) can be crammed down pursuant to the requirements of section 1129(b)(2), the Debtors have complied with section 1129(a)(8) of the Bankruptcy Code. I. The Plan Complies with Statutorily Mandated Treatment of Administrative and Priority Tax Claims (Section 1129(a)(9)). 112. Section 1129(a)(9) of the Bankruptcy Code requires that persons holding claims entitled to priority under section 507(a) of the Bankruptcy Code receive specified cash payments under the Plan. Unless the holder of a particular claim agrees to a different treatment with respect to such claim, section 1129(a)(9) of the Bankruptcy Code requires the Plan to provide as follows: (A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of [the Bankruptcy Code], on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim; (B) with respect to a class of claims of a kind specified in section 507(a)(1), 507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7) of [the Bankruptcy Code], each holder of a claim of such class will receive: (i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the allowed amount of such claim; (C) with respect to a claim of a kind specified in section 507(a)(8) of [the Bankruptcy Code], the holder of such claim will receive on account of such claim regular installment payments in cash
108 See Voting Report 18.
59 K&E 19103759 (i) of a total value, as of the effective date of the plan, equal to the allowed amount of such claim; (ii) over a period ending not later than 5 years after the date of the order for relief under section 301, 302, or 303; and (iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan (other than cash payments made to a class of creditors under section 1122(b)). 109
113. In accordance with section 1129(a)(9) of the Bankruptcy Code, the Plan provides that each holder of an allowed administrative claim will receive payment in full in cash on the Effective Date or as soon as practicable thereafter. If the administrative claim is not allowed as of the Effective Date, each holder of an allowed administrative claim will receive payment in full in cash no later than 30 days after the date on which an order of the Bankruptcy Court Allowing such administrative claim becomes a final order, or as soon as reasonably practicable thereafter. If the allowed administrative claim is based on liabilities incurred by the Debtors in the ordinary course of their business after the Petition Date, each holder of an allowed administrative claim will receive payment pursuant to the terms and conditions of the particular transaction giving rise to such allowed administrative claims, without any further action by the holders of such allowed administrative claims. 110
114. In addition, Article II.I of the Plan provides that each holder of an allowed priority tax claim shall receive (a) cash, payable by the Debtors on the Effective Date, in an amount equal to the amount of such allowed priority tax claim, (b) cash in an amount agreed to and paid by the liable Debtors (on the Effective Date) or paid by the liable Post-Effective Date Debtors (after the Effective Date), as applicable, and such holder, provided that such parties may further
109 11 U.S.C. 1129(a)(9). 110 See Plan, Art. II.A.
60 K&E 19103759 agree for the payment of such allowed priority tax claim to occur at a later date, or (c) at the option of the Debtors (on the Effective Date) or the Post-Effective Date Debtors (after the Effective Date), as applicable, cash paid by the liable Post-Effective Date Debtor in the aggregate amount of such allowed priority tax claim, payable in installment payments over a period not more than five years after the Petition Date pursuant to section 1129(a)(9)(C) of the Bankruptcy Code. 111
115. The Debtors are not aware of any dispute regarding the treatment of administrative or priority tax claims. For the reasons set forth above, the Plan complies with the requirements of section 1129(a)(9) of the Bankruptcy Code. J. At Least One Impaired Class of Claims Has Accepted the Plan, Excluding the Acceptances of Insiders (Section 1129(a)(10)). 116. Section 1129(a)(10) of the Bankruptcy Code is an alternative requirement to section 1129(a)(8)s requirement that each class of claims or interests must either accept a plan or be unimpaired under the plan. Section 1129(a)(10) provides that if a class of claims is impaired under a plan, at least one impaired class of claims must accept the plan, excluding acceptance by any insider. 112
117. As detailed herein and in the Voting Report, 21 of 22 Voting Classes have accepted the Debtors Plan. This breaks down as follows: Remaining Debtor Plan: Six of eight Voting Classes for each applicable Debtor affirmatively voted to accept the Remaining Debtor Plan (a seventh Voting Class (Class R12) did not vote at all and is, therefore, deemed to have voted to accept the Remaining Debtor Plan). Fixed/Floating Plan: All four Voting Classes for each applicable Debtor affirmatively voted to accept the Fixed/Floating Plan.
111 See Plan, Art. II.I. 112 11 U.S.C. 1129(a)(10).
61 K&E 19103759 Anaheim Plan: Five of the seven Voting Classes for each applicable Debtor affirmatively voted to accept the Anaheim Plan (two Voting Classes (Classes A1 and A2) did not vote at all and are, therefore, deemed to have voted to accept the Anaheim Plan). Ontario Plan: All three Voting Classes for each applicable Debtor affirmatively voted to accept the Ontario Plan. 113
These voting results reflect overwhelming support for all four Joint Plans, including the Remaining Debtor Plan, in satisfaction of section 1129(a)(10). 118. There is only one Voting Class that did not vote to accept; Class R4B voted to reject the Remaining Debtor Plan with respect to Grand Prix Holdings. Class R4B is the only Voting Class with claims by non-insiders against Grand Prix Holdings. There are six parties entitled to vote in Class R4B, and together, Lehman and Midland hold approximately 85% of the amount of claims entitled to vote in Class R4B. 114 Lehman and Midland have both asserted that the Plan for Debtor Grand Prix Holdings cannot be confirmed because there is no impaired accepting class that can satisfy the requirements of section 1129(a)(10) of the Bankruptcy Code. 115
119. Lehmans and Midlands objections, however, rely on the incorrect assumption that section 1129(a)(10) must be satisfied on a per-debtor basis. Bankruptcy Courts in the Southern District of New York have held it is appropriate to test compliance with Section 1129(a)(10) on a per-plan basis, not . . . on a per-debtor basis. 116 As the Enron court explained: The plain language and inherent fundamental policy behind section 1129(a)(10) of the Bankruptcy Code provides that an affirmative vote of one impaired class under a plan is
113 See Voting Report 18. 114 See id. Ex. B. 115 See Lehman Objection 12-15; Midland Objection 26-32. 116 See Charter Commcns, 419 B.R. at 266.
62 K&E 19103759 sufficient to satisfy section 1129(a)(10) of the Bankruptcy Code. 117 The Court further stated that: In addition, the Court notes that at least one court has confirmed a chapter 11 plan (without requiring either substantive consolidation or the filing of separate plans) where it appears that impaired classes of certain (but not all) of the jointly administered debtors vote only for the one plan before the court. See, e.g., In re Resorts Intl Inc., 145 B.R. 412, 416 (Bankr. D. N.J. 1990). It is quite common for debtors with a complex corporate structure to file a joint chapter 11 plan pursuant to which the corporate form is preserved, or in which a deemed consolidation is proposed and approved. In such circumstances, all debtors are treated as a single legal entity for voting and distribution purposes (emphasis added). See, e.g., In re Genesis Health Ventures, Inc., 266 B.R. 591, 619 (Bankr. D. Del. 2001). 118
120. The Debtors corporate structure is extraordinarily complex and no party has asserted otherwise. The Debtors are a self-administered REIT, consisting of 92 Debtors that operate 71 hotels across 19 states and Washington D.C., and are subject to nine separate tranches of debt consisting of eleven separate loans, eight of which have been securitized into the CMBS market. Since the filing, the Debtors have preserved their corporate structure and continued to manage their business on an enterprise-level. Accordingly, the Bankruptcy Court has authority to treat the Debtors, or a subset of the Debtors, as a single legal entity for voting and distribution purposes. 119
121. Lehmans and Midlands objections provide little support for the proposition that section 1129(a)(10) of the Bankruptcy Code must be satisfied for each debtor. Both Lehman and Midland misguidedly focus on substantive consolidation, which the Debtors agree is not provided for in the Plan. 120 Neither Lehman nor Midland present case law supporting the
117 See In re Enron Corp., Case No. 01-16034 at 138 (Bankr. S.D.N.Y. Jul 15, 2004). 118 Id. 119 See id. 120 See Lehman Objection 14-15; Midland Objection 28, 30.
63 K&E 19103759 proposition that section 1129(a)(10) may not be satisfied on a per-plan basis and, instead, merely cite cases where courts have confirmed plans at the individual debtor level. 122. Notably, though Enron involved substantive consolidation, the court specifically recognized that the per-plan requirement applies even without substantive consolidation. 121
Moreover, In re SGPA, Inc., a case involving a joint plan of reorganization for non-substantively consolidated debtors, is on point. 122 The SGPA debtors also were jointly administered but not substantively consolidated. The court ruled that under such circumstances it is not necessary to have an impaired class of creditors of each debtor vote to accept the plan. 123 More recently, Judge Peck in In re Charter Commncs, where the debtors also were not substantively consolidated, stated: [I]t is appropriate to test compliance with section 1129(a)(10) on a per-plan basis, not, as the CCI Noteholders argue, on a per-debtor basis. See In re Enron Corp., No. 0116034 (Bankr.S.D.N.Y. July 15, 2004) (confirming joint chapter 11 plan where each debtor did not have an impaired accepting class); In re SGPA, Inc., No. 01-02609, 2001 WL 34750646 (Bankr.M.D.Pa. Sept. 28, 2001) (same). Here, the evidence supports a finding that the business of Charter is managed by CCI on an integrated basis making it reasonable and administratively convenient to propose a joint plan. That joint Plan has been accepted by numerous other impaired accepting classes, thereby satisfying the requirement of section 1129(a)(10). 124
123. Replace the CCI Noteholders with Lehman and Midland, and Charter with Innkeepers, and Judge Pecks reasoning is applicable to the facts here. The Debtors are managed on an integrated basis and, thus, the Debtors proposal of a joint plan is reasonable and administratively convenient. Further, the Remaining Debtor Plan has been accepted by
121 Enron, Case No. 01-16034 at 138 (Bankr S.D.N.Y. Jul. 15, 2004) (emphasis added). 122 In re SGPA, Inc., No. 01-02609 (Bankr. M.D. Pa. Sept. 28, 2001). 123 Id. at 16-17 (I agree with [d]ebtors position that in a joint plan of reorganization it is not necessary to have an impaired class of creditors of each Debtor vote to accept the Plan.); see also In re Stations Casinos, Inc., 2010 WL 6564147, at *28-29 (Bankr. D. Nev. Aug. 27, 2010). 124 Charter Commcns, 419 B.R. at 266.
64 K&E 19103759 numerous impaired classes, thus satisfying the requirement of section 1129(a)(10) with respect to Grand Prix Holdings. 124. Midlands and Lehmans arguments with respect to section 1129(a)(10) further ring hollow considering the circumstances of the Debtors consent to Lehmans and Midlands request for ballots to vote on the Remaining Debtor Plan. The Debtors, Midland, and Lehman entered into a stipulation permitting Midland and Lehman to vote on the Remaining Debtor Plan specifically to postpone litigation on Midlands and Lehmans guaranty claimswhile preserving Midlands and Lehmans rights to pursue objections justifiably related to their interests as creditors. 125 This compromise quite obviously was intended to facilitate confirmation of the Remaining Debtor Plan contemporaneous with the Fixed/Floating Plan, Anaheim Plan, and Ontario Plan. 125. It is manifestly evident that a global resolution is in the best interests of all parties in interest. Midland and Lehman are improperly attempting to extract litigation leverage with respect to their alleged guaranty claims by voting to reject the Remaining Debtor Plan. The Court should reject this inappropriate and self-defeating tactic. 126. Impeding confirmation of the Grand Prix Holdings plan does not benefit any of the parties in these Chapter 11 Cases, including Midland and Lehman. The Plan, as proposed, is the only plan that can be confirmed for Grand Prix Holdings. Confirmation of the Remaining Debtor Plan avoids the increased administrative costs and reduced distributable value that would necessarily follow any alternative path to concluding the cases of the Remaining Debtors or Grand Prix Holdings. As a result, no party is prejudiced by confirmation of the Remaining Debtor Plan.
125 See Voting Stipulation 2-4.
65 K&E 19103759 K. The Plan Is Feasible (Section 1129(a)(11)). 127. Section 1129(a)(11) of the Bankruptcy Code requires that the Bankruptcy Court find that the plan is feasible as a condition precedent to confirmation. Specifically, the Bankruptcy Court must determine that Confirmation of the Plan is not likely followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is contemplated by the Plan. 126
128. To demonstrate that a plan is feasible, it is not necessary that success be guaranteed. 127 In making determinations as to feasibility . . . a bankruptcy court does not need to know to a certainty or even a substantial probability, that the plan will succeed. All it needs to know is that the plan has a reasonable likelihood of success. 128 As such, when evaluating the feasibility of a chapter 11 plan, courts in this District have identified the following probative factors: the prospective earnings of the business or its earning power; the soundness and adequacy of the capital structure and working capital for the business which the debtor will engage in post-confirmation; the prospective availability of credit; whether the debtor will have the ability to meet its requirements for capital expenditures; economic and market conditions;
126 11 U.S.C. 1129(a)(11). 127 See Johns-Manville, 843 F.2d at 649 ([T]he feasibility standard is whether the plan offers a reasonable assurance of success. Success need not be guaranteed.) 128 In re Adelphia Bus. Solutions, Inc., 341 B.R. 415, 42122 (Bankr. S.D.N.Y. 2003); In re One Times Square Assocs. Ltd. Pship, 159 B.R. 695, 709 (Bankr. S.D.N.Y. 1993) (It is not necessary that the success be guaranteed, but only that the plan present a workable scheme of reorganization and operation from which there may be a reasonable expectation of success.) (internal quotations and citations omitted); In re Texaco Inc., 84 B.R. 893, 910 (Bankr. S.D.N.Y. 1988) (All that is required is that there be reasonable assurance of commercial viability), appeal dismissed, 92 B.R. 38 (S.D.N.Y. 1988); In re Prudential Energy Co., 58 B.R. 857, 862 (Bankr. S.D.N.Y. 1986) (Guaranteed success in the stiff winds of commerce without the protection of the Code is not the standard under 1129(a)(11).).
66 K&E 19103759 the ability of management, and the likelihood that the same management will continue; and any other related matter which determines the prospects of a sufficiently successful operation to enable performance of the provisions of the plan. 129
129. Under these factors, the Debtors Plan is feasible. As noted above, the Debtors sought chapter 11 protection because macroeconomic circumstances had decreased the Debtors revenues and impaired the Debtors abilities to service their debt. Through the sale of assets, the modification of debt obligations, and infusions of new capital, the Debtors have worked with the sophisticated counterparties to the Plans restructuring transactions to ensure economically sound business models going forward. 130
130. The Debtors management has developed Financial Projections for the years 2011 through 2015 to further demonstrate that the Plan is feasible. 131 In general, as illustrated by the Financial Projections, the Debtors believe that their business operations will remain viable and, in fact, grow following consummation of the Plan. In addition, the Debtors have thoroughly analyzed their ability to meet their short- and long-term obligations following consummation of the Plan and submit that Confirmation is not likely to be followed by liquidation or the need for further reorganization. Accordingly, the Plan and each Joint Plan is feasible and satisfy the standards of section 1129(a)(11) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1129(a)(11) of the Bankruptcy Code.
129 See, e.g., WorldCom, 2003 WL 23861928, at *58; In re Leslie Fay Cos., 207 B.R. 764, 789 (Bankr. S.D.N.Y. 1997); Texaco, 84 B.R. at 910; Prudential Energy, 58 B.R. at 86263. 130 On a consolidated basis, the transactions contemplated by the Plan right-size the combined balance sheets of the post-reorganization Debtors by reducing debt by almost $550 million through assets sales and the turnover of a hotel. 131 See Disclosure Statement, Ex. B.
67 K&E 19103759 L. The Plan Provides for Payment of All Fees Under 28 U.S.C. 1930 (Section 1129(a)(12)). 131. Section 1129(a)(12) of the Bankruptcy Code requires the payment of all fees payable under 28 U.S.C. 1930. 132 Article XII.C of the Plan provides that such fees will be paid by the Debtors (prior to or on the Effective Date) or the Post-Effective Date Debtors (after the Effective Date) for each quarter (including any fraction thereof) until the Chapter 11 Cases are converted, dismissed, or closed, whichever comes first. 133 Therefore, the Plan complies with section 1129(a)(12) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1129(a)(12) of the Bankruptcy Code. M. The Plan Provides for Payment of Retiree Benefits (Section 1129(a)(13)). 132. Section 1129(a)(13) of the Bankruptcy Code requires that all retiree benefits continue to be paid post-confirmation at any levels established in accordance with section 1114 of the Bankruptcy Code. 134 The Debtors do not have any retiree benefit programs. In light of the foregoing, the Plan satisfies the requirements of section 1129(a)(13) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1129(a)(13) of the Bankruptcy Code. N. The Plan Satisfies the Cramdown Requirements of Section 1129(b) of the Bankruptcy Code. 133. Section 1129(b) of the Bankruptcy Code provides that if all applicable requirements of section 1129(a) are met other than section 1129(a)(8), a plan may be confirmed so long as the requirements set forth in section 1129(b) are met. To confirm a plan that has not been accepted by all impaired classes (thereby failing to satisfy section 1129(a)(8)), the plan
68 K&E 19103759 proponent must demonstrate that the plan does not discriminate unfairly and is fair and equitable with respect to the non-accepting impaired classes. 135
134. As described above, Classes FF6, FF7, FF8, FF9, A5B, A6, A7, A8, O5, O6, O7, O8, R5, R7, and R10 will receive no distribution under the Plan; therefore, they are deemed to have rejected the Plan. Class R4B voted to reject the Remaining Debtor Plan. Despite the rejection of the Plan by these impaired classes, the Debtors have satisfied the cramdown requirements under section 1129(b) of the Bankruptcy Code. 1. The Plan Does Not Unfairly Discriminate With Respect to Impaired Classes. 135. The Plan does not discriminate unfairly with respect to the impaired classes that have rejected or are deemed to have rejected the Plan. To be clear, section 1129(b)(1) of the Bankruptcy Code does not prohibit all forms of discrimination between classes of similarly situated creditors. Section 1129(b)(1) only prohibits unfair discrimination. The Bankruptcy Code does not provide a standard for determining when unfair discrimination exists; courts typically examine the facts and circumstances of the particular case to make such a determination. 136 Courts have held that a plan unfairly discriminates in violation of section 1129(b) only if it provides materially different treatment for creditors and interest holders with similar legal rights without compelling justifications for doing so. 137 Accordingly, a plan that
135 See 11 U.S.C. 1129(b)(1); Boston Post, 21 F.3d at 480 (If the debtor chooses to utilize the cramdown procedure (having failed to secure the vote of all the impaired classes), the plan must meet all of the statutory requirements enumerated in 1129(b) (essentially that the plan is fair and equitable and does not discriminate unfairly against any impaired claims) . . . .); In re Zenith Elecs. Corp., 241 B.R. 92, 105 (Bankr. D. Del. 1999) (explaining that [w]here a class of creditors or shareholders has not accepted a plan of reorganization, the court shall nonetheless confirm the plan if it does not discriminate unfairly and is fair and equitable.). 136 See In re Johns-Manville Corp., 68 B.R. at 636 (The language and legislative history of the statute provides little guidance in applying the unfair discrimination standard.); see also In re Aztec Co., 107 B.R. 585, 589 (Bankr. M.D. Tenn. 1989) (noting that courts have recognized the need to consider the facts and circumstances of each case to give meaning to the proscription against unfair discrimination). 137 Johns-Manville Corp., 68 B.R. at 636.
69 K&E 19103759 provides for disparate treatment of two classes of claims or interests does not unfairly discriminate where: (a) the classes are comprised of dissimilar claims or interests; 138 or (b) the particular facts and circumstances of the case provide a reasonable basis for such disparate treatment. 139 There is no unfair discrimination where two classes receiving different treatment are comprised of dissimilar claims or interests. 140
136. In this case, the treatment of separately classified claims and interests is proper because all similarly situated holders of claims and interests will receive substantially similar treatment and the Debtors have a reasonable basis for the Plans classification scheme. Specifically, the rejecting impaired classes can be categorized into the following subgroups: Mortgage or Mezzanine Loan Deficiency Claims that the respective mortgage and mezzanine lenders have elected to release; Section 510(b) Claims arising from the rescission of a purchase or sale of a security (including any interest) of the Debtors, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 of the Bankruptcy Code on account of such claims that are subordinated pursuant to section 510 of the Bankruptcy Code; Interests in the Debtors that are being cancelled, released, and extinguished on the Effective Date; Intercompany Claims and Interests that are being released or extinguished on the Effective Date to maintain the Debtors organizational structure on account of certain administrative efficiencies; and Guaranty claims against Grand Prix Holdings. 137. None of these classes are similarly situated with other classes and there is a reasonable basis for separately classifying each deemed rejecting impaired class.
138 See id. 139 See, e.g., In re Buttonwood Partners, Ltd., 111 B.R. 57, 63 (Bankr. S.D.N.Y. 1990). 140 See WorldCom, 2003 WL 23861928, at *59 (unfair discrimination occurs where similarly situated classes are treated differently without a reasonable basis for the disparate treatment.).
70 K&E 19103759 138. Nor is there any other basis for unfair discrimination. Holders of similarly situated claims and interests in the deemed rejecting impaired classes will receive the identical treatmentno distribution. Holders of Class R4B claims will each receive distributions in accordance with a Distribution Waterfall. Moreover, all claims and interests in any particular class are sufficiently related to one another. For these reasons, the Plan does not unfairly discriminate with respect to the deemed rejecting impaired classes and satisfies the requirements of section 1129(b). 2. The Plan Is Fair and Equitable With Respect to Impaired Classes. 139. For a plan to be fair and equitable with respect to an impaired class of unsecured claims or interests that rejects a plan (or is deemed to reject a plan), the plan must follow the absolute priority rule and, if the impaired rejecting class consists of unsecured claims, satisfy one of the requirements of section 1129(b)(2)(B), or, if the impaired rejecting class consists of interests, satisfy one of the requirements of section 1129(b)(2)(C). 141 Generally, this requires that (a) no class of claims recover more than the amount of their allowed claims and (b) the impaired rejecting class of claims or interests either be paid in full or that any class junior to the impaired accepting class not receive any distribution under a plan on account of its junior claim or interest. 142
140. The Plan satisfies the absolute priority rule with respect to all rejecting impaired classes of claims and interests and is thus fair and equitable. With respect to Classes FF5, FF6, FF7, FF8, FF9, A6, A7, A8, O5, O6, O7, O8, and R5, there are no junior classes receiving any
141 11 U.S.C. 1129(b)(2)(B)(ii); 11 U.S.C. 1129(b)(2)(C)(ii); see also 203 N. LaSalle St. Pship, 526 U.S. at 44142 (As to a dissenting class of impaired unsecured creditors, such a plan may be found to be fair and equitable only if the allowed value of the claim is to be paid in full, 1129(b)(2)(B)(i), or, in the alternative, if the holder of any claim or interest that is junior to the claims of such [impaired unsecured] class will not receive or retain under the plan on account of such junior claim or interest any property, 1129(b)(2)(B)(ii). That latter condition is the core of what is known as the absolute priority rule.). 142 See id.
71 K&E 19103759 recovery. The only exception among the deemed rejecting impaired classes is Class R5 Intercompany Claims against the Remaining Debtors, which the Debtors have fully impaired on account of certain administrative efficiencies. As such, the Remaining Debtors Intercompany Claims, which result from the business relationships that the Remaining Debtors maintain with other Debtors in the ordinary course of business, are being eliminated. 141. Midland objected that the Plan for Debtor Grand Prix Holdings violates the absolute priority rule. 143 The proposed form of Confirmation Order, however, will provide that Apollos interests in Grand Prix Holdings will be extinguished after all distributions are made in accordance with a Distribution Waterfall and that such distributions shall not be made until all disputed claims are resolved. 142. Accordingly, the Debtors submit the Plan satisfies the requirements of sections 1129(b)(2)(B)(ii) and 1129(b)(2)(C)(ii) for the impaired classes that were deemed to reject the Plan and, therefore, is fair and equitable with respect to those classes. O. The Principal Purpose of the Plan Is Not Avoidance of Taxes or Section 5 of the Securities Act (Section 1129(d)). 143. Section 1129(d) of the Bankruptcy Code states that the court may not confirm a plan if the principal purpose of the plan is the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933. 144 The purpose of the Plan is not to avoid taxes or the application of section 5 of the Securities Act of 1933. Moreover, no party that is a governmental unit, or any other entity, has requested that the Court decline to confirm the Plan on the grounds that the principal purpose of the Plan is the avoidance of taxes or the avoidance of the application of section 5 of the Securities Act of 1933. Accordingly, the Plan satisfies the
72 K&E 19103759 requirements of section 1129(d) of the Bankruptcy Code. The Debtors are not aware of any dispute as to whether the Plan satisfies section 1129(d) of the Bankruptcy Code. II. The Discretionary Contents of the Plan Are Appropriate and Should Be Approved. 144. Section 1123(b) of the Bankruptcy Code identifies various additional provisions that may be incorporated into a chapter 11 plan, including any appropriate provision not inconsistent with the applicable provisions of this title. 145 As set forth below, the Plan includes certain of these discretionary provisions. In particular, the Debtors have determined as fiduciaries of their estates and in the exercise of their reasonable business judgment, that each of the discretionary provisions of the Plan is appropriate given the circumstances of these Chapter 11 Cases. A. The Plans Settlement of Claims and Controversies Is Fair and Equitable and Should be Approved. 145. Article VIII.A of the Plan provides for the settlement of all Causes of Action not expressly retained by the Debtors. Under section 1123(b)(3)(A), a chapter 11 plan may provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate. 146 Such settlements are appropriate when they constitute a valid exercise of the Debtors business judgment, and are fair, reasonable and in the best interests of the estate. 147 In making such a determination, the Court may look to the standards set forth in Bankruptcy Rule 9019. Under Bankruptcy Rule 9019, the Court may approve a settlement so long as it does not
145 11 U.S.C. 1123(b)(1)-(6). 146 11 U.S.C. 1123(b)(3); see also Cosoff v. Fodman (In re W.T. Grant Co.)., 699 F.2d 599, 608 (2d Cir. 1983), cert. denied, 464 U.S. 822 (1983) (citing Newman v. Stein, 464 F.2d 689, 693 (2d Cir. 1972)); see also In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993) ([T]he court need not conduct a mini-trial to determine the merits of the underlying [dispute].); Air Line Pilots Assoc. Intl v. Am. Natl Bank and Trust Co. of Chicago (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 426 (S.D.N.Y. 1993), affd, 17 F.3d 600 (2d Cir. 1994). 147 In re DBSD N. Am., Inc., 419 B.R. 179, 217 (Bankr. S.D.N.Y. 2009).
73 K&E 19103759 fall below the lowest point in the range of reasonableness. 148 The Debtors respectfully submit that settling claims through the Plan and consummating the restructuring supported by the overwhelming majority of the Debtors constituencies is in the best interests of the Debtors estates and within the Debtors sound business judgment. B. The Plans Release Provisions Are Appropriate and Should Be Approved. 146. The Plan provides for the release of certain causes of actionboth a release by the Debtors (the Debtor Releases) and by certain non-Debtor third parties (the Third Party Releases) 149 the inclusion of which was critical to generate consensus in support of the Plan. The Plan provides for mutual releases by the following parties (the Releasing Parties) in their respective capacities: Applicable Plan Releasing Parties Fixed/Floating Debtors Plan The Lehman DIP Lenders; Five Mile; the Five Mile DIP Agent; the Five Mile DIP Lenders; the Debtors (other than Grand Prix Holdings solely with respect to any guaranty Claims of Midland, Lehman, LCPI, or SASCO); Lehman; New HoldCo and each of the Fixed/Floating Plan Sponsors; Midland; the master servicer for the C6 and C7 Trusts; trustees for the C6 and C7 Trusts; the C6 and C7 Trusts; TriMont, in its capacity as special servicer for the Floating Rate Pool Mezzanine Loan Agreement; Apollo; the Committee; the Independent Committee; SASCO, as holder of 100% of the economic and beneficial interests under the Floating Rate Pool Mezzanine Loan Agreement; LCPI, as administrative agent for SASCO with respect to
148 W.T. Grant, 699 F.2d at 608 (citing Newman, 464 F.2d at 693); see also Purofied Down Prods., 150 B.R. at 522; Ionosphere Clubs, 156 B.R. at 426; In re Enron Corp., Case No. 02-8489, 2003 WL 230838, *2 (S.D.N.Y. Jan. 31, 2003) ([A]pproval of the settlement lies within the sound discretion of the bankruptcy court.) (citations omitted). This determination is to be made based on: the probabilities of ultimate success should the claim be litigated and an educated estimate of the complexity, expense, and likely duration of . . . litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation. In re AppliedTheory Corp., Case No. 02-11868, 2008 WL 1869770, at *3 (Bankr. S.D.N.Y. Apr. 24, 2008) (internal citations omitted). 149 The Plan also provides for Midland to release Apollo in exchange for a cash payment by NewCo to Midland of $3 million to be made on the effective date of the Fixed/Floating Plan.
74 K&E 19103759 Applicable Plan Releasing Parties the Floating Rate Pool Mezzanine Loan Agreement and holder of 100% of the economic and beneficial interests in SASCO; Island Hospitality Management, Inc.; all other Holders of Claims against or Interests in the Fixed/Floating Debtors; the officers, directors, trustees, and members of the Debtors; and each of the foregoing entities respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, master servicers, special servicers, trusts and trustees, and professionals. Anaheim Hotel Debtors Plan The Debtors (other than Grand Prix Holdings solely with respect to any guaranty Claims of Midland, Lehman, LCPI, or SASCO); CWCapital; TriMont, in its capacity as servicer for the Anaheim Hotel Mezzanine Loan Agreement; Apollo; SASCO, as holder of 100% of the economic and beneficial interests under the Anaheim Hotel Mezzanine Loan Agreement; LCPI, as administrative agent for SASCO with respect to the Anaheim Hotel Mezzanine Loan Agreement and holder of 100% of the economic and beneficial interests in SASCO; the Independent Committee; all other Holders of Claims against or Interests in the Anaheim Hotel Debtors; the officers, directors, trustees, and members of the Debtors; and each of the foregoing entities respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, master servicers, special servicers, trusts and trustees, and professionals. Ontario Hotel Debtors Plan The Debtors (other than Grand Prix Holdings solely with respect to any guaranty Claims of Midland, Lehman, LCPI, or SASCO); C-III; Apollo; the Independent Committee; all other Holders of Claims against or Interests in the Ontario Hotel Debtors; the officers, directors, trustees, and members of the Debtors; and each of the foregoing entities respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, master servicers, special servicers, trusts and trustees, and professionals. Remaining Debtor Plan The Debtors (other than Grand Prix Holdings solely with respect to any guaranty Claims of Midland, Lehman, LCPI, or SASCO); Chatham; the Five Mile DIP Agent; the Five Mile DIP Lenders; LNR, in its capacity as special servicer for the each of the LNR-Serviced Loans; the LNR-
75 K&E 19103759 Applicable Plan Releasing Parties Serviced Trusts; the master servicer for each of the LNR- Serviced Loans; Apollo; the Independent Committee; Island Hospitality Management, Inc.; all other Holders of Claims against or Interests in the Remaining Debtors; the officers, directors, trustees, and members of the Debtors; and each of the foregoing entities respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, master servicers, special servicers, trusts and trustees, and professionals.
1. The Debtor Releases Are in the Best Interests of the Debtors Estates and Are a Sound Exercise of the Debtors Business Judgment. 147. As set forth in Articles VIII.EH of the Plan, the Debtor Releases provide that the Debtors shall fully discharge and release all claims and Causes of Action against (a) the Fixed/Floating Releasing Parties, (b) the Anaheim Hotel Releasing Parties, (c) the Ontario Hotel Releasing Parties, and (d) the Remaining Debtor Releasing Parties, arising from or related in any way to the Debtors. 148. Section 1123(b)(3)(A) of the Bankruptcy Code explicitly provides that a chapter 11 plan may provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate. 150 Although a release may not qualify as a settlement under Bankruptcy Rule 9019, the rules governing the approval of a settlement are useful in evaluating plan releases. In reviewing releases in a debtors plan, courts frequently use the best interests of the estate benchmark for approval of a settlement under Bankruptcy Rule 9019. 151
150 11 U.S.C. 1123(b)(3)(A). 151 See generally Bally Total Fitness, 2007 WL 2779438, at *12 (To the extent that a release or other provision in the Plan constitutes a compromise of a controversy, this Confirmation Order shall constitute an order under Bankruptcy Rule 9019 approving such compromise.); In re Spiegel, Inc., Case No. 03-11540, 2005 WL 1278094, at *11 (Bankr. S.D.N.Y. May 25, 2005) (approving releases pursuant to section 1123(b)(3) of the Bankruptcy Code and Bankruptcy Rule 9019(a)).
76 K&E 19103759 149. It is well-settled that debtors are authorized to settle or release their claims in a chapter 11 plan. 152 Courts in this district have approved similar debtor-release provisions in other chapter 11 cases. 153 In this case, the Debtor Releases are the product of arms-length negotiations, are in exchange for substantial consideration, and have been critical to obtaining support for the Plan from various constituencies. Indeed, the Debtor Releases were heavily negotiated in connection with other terms of the Plan, and are an indispensable component to achieving global peace in these Chapter 11 Cases 150. The Debtor Releases are limited solely to claims or causes of action that belong to the Debtors, and consist primarily of potential preference actions against trade creditors (Trade Preference Claims), potential preference actions against insiders, like directors, officers, and shareholders (Insider Preference Claims), and potential claims against third parties arising out of the Acquisition (LBO Claims). 154 After investigation and analysis, the Debtors believe the claims released pursuant to the Debtor Releases are of negligible to no value and therefore it is in the best interests of the Debtors estates to provide the Debtor Releases. 155
a. Trade Preference Claims. 156
151. Pursuant to section 547 of the Bankruptcy Code, transfers of property immediately prior to the filing of a bankruptcy petition may be avoided by the debtor as a preferential payment, and the property or the value of the property returned to the debtor. Two
152 See In re Adelphia Commcns Corp., 368 B.R. 140, 263 n.289, 269 (Bankr. S.D.N.Y. 2007) (debtor may release its own claims); In re Oneida Ltd., 351 B.R. 79, 94 (Bankr. S.D.N.Y. 2006) (noting that a debtors release of its own claims is permissible). 153 See, e.g., In re Neff Corp., Case No. 10-12610 (Bankr. S.D.N.Y. Sept. 21, 2010); In re DJK Residential LLC, Case No. 08-10375 (Bankr. S.D.N.Y. May 7, 2008); In re Calpine Corp., Case No. 05-60200 (Bankr. S.D.N.Y. Dec. 19, 2007); In re Tower Auto., Inc., Case No. 05-10578 (Bankr. S.D.N.Y. July 9, 2007); see also In re Movie Gallery, Case No. 07-33849 (Bankr. E.D. Va. Apr. 10, 2008). 154 Brents Decl. 4. 155 Id. 156 See Brents Decl. 5-6.
77 K&E 19103759 steps are required to analyze whether a challenged transfer may be avoided under this section. First, the debtor must carry the burden of proving the existence of the elements of a preferential transfer. 157 Second, if the debtor establishes a prima facie case for avoidance, the burden shifts to the creditor-defendant to establish any of the safe harbors, or exceptions, to preference liability; most notably for the present analysis, (a) new value provided by the vendor that offsets these payments or (b) the payment was made in the ordinary course of business. 158
152. In the months immediately following the Petition Date, the Debtors professionals performed an analysis of potential preference claims against the Debtors vendors, which included, among other things, the following steps: Analyzing data provided to them by the Debtorsdata which included payment information, payment invoice detail, unpaid invoice information, and vendor information; Identifying and quantifying all payments made to vendors during the 90-day preference period; Calculating the amount of new value provided by the vendors and offsetting those amounts to the preference period payments; Performing ordinary course of business analyses and excluding certain payments as ordinary course of business payments; and Assigning percentage ranges of net preference recoveries. 153. As of December 2010, this analysis estimated the maximum potential preference payment recoveries on account of Trade Preference Claims would not exceed $600,000. As of
157 The seven factors are as follows: (1) a transfer; (2) of an interest of the debtor in property; (3) to or for the benefit of a creditor; (4) for or on account of an antecedent debt; (5) made while the debtor was insolvent; (6) made on or within 90 days before the filing of the bankruptcy petition (or, if at the time of the prepetition transfer, the creditor was an insider made within one year prior to the filing of the petition); and (7) that enables the creditor to obtain more than it would receive if (a) the case were a chapter 7 liquidation proceeding, (b) the transfer had not been made, and (c) the creditor had received payment of the debt to the extent provided by the Bankruptcy Code. See 11 U.S.C. 547. 158 The defenses to preference liability, as set forth in section 547(c) of the Bankruptcy Code are as follows: (1) contemporaneous exchange, 547(c)(1); (2) ordinary course transfers, 547(c)(2); (3) enabling loans, 547(c)(3); (4) subsequent advances of new value, 547(c)(4); (5) floating liens, 547(c)(5); (6) statutory liens, 547(c)(6); (7) domestic relations debts, 547(c)(7); and (8) small consumer transfers, 547(c)(8).
78 K&E 19103759 today, and after giving consideration to section 502(h) claims under the Bankruptcy Code, such claims do not exceed $200,000. Taking into account the significant expected costs of pursuing such recoveries, the Debtors made the determination that they held no material causes of action against such creditors. Importantly, no party has challenged the Debtors release of these claims. Accordingly, the Debtors believe releasing the Trade Preference Claims is appropriate under the circumstances. b. Insider Preference Claims. 159
154. Section 547(b) of the Bankruptcy Code provides the debtor with the ability to avoid any transfer of an interest of the debtor in property if the transfer was between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider . . . . 155. The Debtors investigated all prepetition payments made to insiders and publicly disclosed all such payments on their Statements of Financial Affairs at SOFA 3(C) - Payments to Insiders. 160 The Debtors concluded that all such payments, including salaries, benefits, incentives and expense reimbursements, were either offset by new value provided by such insiders, paid pursuant to previously negotiated written employment agreements, or otherwise made in the ordinary course of business. As a result, the Debtors concluded that no improper payments were paid to insiders. 156. One Easta party that, as discussed herein, made its first appearance of any kind in these Chapter 11 Cases by filing, without warning, a confirmation objection to extract hold-up value for self-interested pecuniary reasonsalleged in its objection that the Debtors release of
159 See Brents Decl. 7-8. 160 See Statement of Financial Affairs for Innkeepers USA Limited Partnership Case No. 10-13794 (SCC), Exhibit 3c - Payments to Insiders [Case No. 10-13794, Docket No. 5]).
79 K&E 19103759 such claims is somehow inappropriate, arguing the Debtors directors and officers have not provided value to the Debtors estates that justifies such releases. 161 But as set forth in detail in Section II.B.3 below, the efforts of the Debtors directors and officers have been essential to the success of these Chapter 11 Casesfrom value-enhancing prepetition agreements with Marriott, to above-market operational success while in bankruptcy, to obtaining the highest possible sale price for both the Fixed/Floating Properties and the LNR Properties. Without the contributions of the Debtors directors and officers, the Debtors would not be presenting the Court with a largely consensual chapter 11 plan of reorganization that provides meaningful recoveries to unsecured creditors less than one year after the Petition Date. 157. Accordingly, because prosecution of Insider Preference Claims would yield little or no value for the Debtors estates and because the Debtors directors and officers have provided substantial value to the Debtors estates, the Debtors believe releasing such claims is appropriate. c. LBO Claims. 162
158. The governing tests for determining whether a conveyance is not for fair consideration or reasonably equivalent value and is thus constructively fraudulent are as follows: (a) whether the debtor is insolvent or rendered insolvent by the transfer; (b) whether the debtor was left with unreasonably small capital; or (c) whether the debtor intended or believed that it would incur debts beyond its ability to pay. 163
159. In the early stages of these Chapter 11 Cases, the Debtors explored whether potential fraudulent conveyance LBO Claims against third parties could credibly arise out of the
161 See One East Objection 30, 3536. 162 See Beilinson Decl. 50-55. 163 In re Nirvana Rest., Inc., 337 B.R. 495, 501 (S.D.N.Y. Bankr. 2006).
80 K&E 19103759 Acquisition. This examination suggested no infirmities. Pursuant to the terms of the Final Cash Collateral Order, the Debtors agreed not to use cash collateral to further investigate potential LBO Claims. At the time the Debtors entered into the Final Cash Collateral Order, they believed there were no credible LBO Claims arising out of the Acquisition. 160. As described in Article IV.M of the Disclosure Statement (Statement of the Creditors Committee), the Creditors Committee conducted its own substantial investigation into the Acquisition. Following entry of a Court order on August 25, 2010 authorizing the Creditors Committee to take discovery pursuant to Federal Rule of Bankruptcy Procedure 2004, 164 the Creditors Committee obtained and reviewed in excess of 550,000 pages of information provided by, among others, the Debtors, Apollo, Lehman, and Midland. 161. Utilizing this information, the Creditors Committee and its advisors performed a factual and legal review of potential claims against third parties arising out of the Acquisition. Following its investigation and analysis, the Creditors Committee negotiated a settlement with the Fixed/Floating Debtors, Five Mile, Lehman and Midland first memorialized in the Five Mile/Midland Commitment and that now includes, among other things, a $4.75 million recovery to general unsecured creditors. 165 The Creditors Committee concluded the settlement distribution was a preferable alternative to litigation and in the best interests of general unsecured creditors. And the Creditors Committee supports the Plan and all releases contained therein.
164 Order Permitting the Official Committee of Unsecured Creditors of Innkeepers USA Trust et al. to Conduct Rule 2004 Discovery of the Debtors and Other Parties [Docket No. 314]. 165 See Exhibit C to Exhibit 1 to the Order (I) Authorizing the Debtors to Enter into the Amended Commitment Letter with Five Mile Capital II Pooling REIT LLC, Lehman ALI Inc., and Midland Loan Services, (II) Approving the Amended New Party/Midland Commitment Between the Debtors and Midland Loan Services, (III) Approving Fixed/Floating Bidding Procedures, (IV) Approving Bid Protections, (V) Authorizing an Expense Reimbursement to Bidder D, and (VI) Modifying Cash Collateral Order to Increase Expense Reserve [Docket No. 1009].
81 K&E 19103759 162. Based on the Creditors Committees investigation and the Debtors own preliminary analysis, the Debtors believe the settlement of potential LBO Claims embodied in the Plan is fair and reasonable. One East has nevertheless objected to the Debtors release of LBO Claims, claiming the Debtors are gratuitously releasing potential causes of action on account of the LBO Claims. 166 This objection is misguided and without support. As described above, the Debtors, the Creditors Committee, and the Ad Hoc Committee have each examined potential LBO Claims and have separately determined such claims are not worth pursuing. By stark contrast, One East does not purport to have conducted a credible investigation into the validity of potential LBO Claims, and is now grasping at straws in an unjustified attempt to concoct and exert leverage where none properly exists. 163. In light of the foregoing, the Debtors respectfully submit the Debtor Releases contained in Articles VIII.EVIII.H of the Plan are well-considered, consistent with applicable law, represent a valid exercise of the Debtors business judgment, and should be approved. 2. The Third Party Releases Are Fair, Equitable, and Reasonable, and Are in the Best Interests of the Debtors and All Holders of Claims. 167
164. In addition to the Debtor Releases, Articles VIII.EVIII.H of the Plan provide for the Third Party Releasesa mutual release and discharge by the Releasing Parties from any and all Causes of Action, whether for tort, fraud, contract, violations of federal or state securities laws, or otherwise, arising from or related in any way to the Debtors or the post-Effective Date Debtors, the transactions contemplated by the Plan, [or] the Chapter 11 Cases . . . . 168 The Debtors recently resolved the U.S. Trustees objection to confirmation by agreeing that the
166 One East Objection 22. 167 See Beilinson Decl. 56-58. 168 See, e.g., Plan, Art. VIII.E.
82 K&E 19103759 Rejecting Series C Holders (as defined herein) would not provide a release to, or receive a release from Apollo. 165. As an initial matter, the Third Party Releases are reasonable and consistent with public policy. They do not release claims by governmental agencies in respect of securities laws, criminal laws, or otherwise, except to the extent such claims may otherwise be subject to the discharge granted to the Debtors under sections 524 and 1141 of the Bankruptcy Code. 169
Rather, they protect the Plan and insulate the Debtors from indirect liability while preserving government or regulatory enforcement actions. 166. Further, the Third Party Releases are the product of arms-length negotiations in connection with the transactions and global settlement that form the basis of the Plan. And the Third Party Releases constitute a good-faith settlement and compromise of claims released by the Third Party Releases, given in exchange for good and valuable consideration. 167. In the Second Circuit, under the so-called Metromedia standard, a third party release is permissible where truly unusual circumstances render the release terms important to success of the plan, focusing on the following factors: 170
the estate received substantial consideration; the enjoined claims were channeled to a settlement fund rather than extinguished; the enjoined claims would indirectly impact the reorganization by way of indemnity or contribution;
169 See Plan, Art. VIII.CVIII.H. 170 Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142-43 (2d Cir. 2005); Drexel Burnham Lambert, 960 F.2d at 293 (In bankruptcy cases, a court may enjoin a creditor from suing a third party, provided the injunction plays an important part in the debtors reorganization plan.); see also Rosenberg v. XO Commcns, Inc. (In re XO Commc,ns, Inc.), 330 B.R. 394, 440 (Bankr. S.D.N.Y. 2005) (non-consensual third party releases satisfied Metromedia standard where substantial consideration was provided for the releases, there was an identity of interest between the debtor and releasees as a result of indemnification/contribution exposure of the Debtor, and the release was necessary to the Plan process).
83 K&E 19103759 the plan otherwise provided for the full payment of the enjoined claims; or the affected creditors consent. Under the Metromedia standard, the Third Party Releases set forth in the Plan are proper. a. The Debtors Estates Have Received Substantial Contributions from the Releasing Parties. 171
168. The first of the Metromedia factors examines whether the debtors estate received substantial consideration in exchange for the Third Party Releases. The Releasing Parties have provided such substantial consideration. As an initial matter, inclusion of the Third Party Releases in the Plan was crucial in achieving consensus in these Chapter 11 Cases. Without such releases, the Debtors and their various constituents would presently be facing a hotly contested confirmation hearing, with its substantial costs and uncertainties, to the detriment of all parties in interest. Provision of the Third Party Releases enabled the Debtors to realize global peace among their key constituents and arrive on the doorstep of a largely consensual confirmation hearing. And the Releasing Parties are each willing to provide the releases in large part because of the substantial consideration provided under the Plan to the Debtors estates. 169. The Plan is the culmination of substantial consideration provided by the various Releasing Parties who are, because of the mutual nature of the Third Party Release, also the beneficiaries of those releases. For example, the Debtors have contributed vast amounts of energy and resources to maximizing the value of their estates and ensuring a successful conclusion to these Chapter 11 Cases to the benefit of all parties-in-interest. Without the Debtors tireless efforts, the Plan would likely not have resulted in its current significant recoveries.
171 See Beilinson Decl. 59-63.
84 K&E 19103759 170. Similarly, Five Mile, Lehman, and Midland have each made substantial contributions to these Chapter 11 Cases that have inured to the benefit of the Debtors estates and all parties in interest. They have all been intimately involved with the Debtors restructuring process from day one, working with the Debtors to formulate a reorganization plan that would maximize the value of the Debtors estates. Affiliates of Five Mile and Lehman provided the Debtors two DIP Financings. Indeed, Five Mile/Lehman provided, with Midlands support, the stalking horse bid for the Fixed/Floating Propertiesa bid that paved the way for a spirited auction. And at the Fixed/Floating Auction, Five Mile/Lehman submitted numerous overbids, which contributed to the creation of additional value captured in Cerberus/Chathams winning bid. 171. Likewise, Cerberus/Chathams bid of over $1.1 billion for the Fixed/Floating Properties and Chatham L.P.s bid of $195 million for the LNR Properties have dramatically increased stakeholder recoveries in these Chapter 11 Cases. Indeed, the contributions of Cerberus/Chatham and Chatham L.P. form the backbone of the Plan. 172. Additionally, as described elsewhere herein, the Ad Hoc Committee has provided substantial consideration to the Debtors estates. For example, under the Ad Hoc Committee Agreement, the Ad Hoc Committee has agreed to waive any right to challenge the allowability of the Innkeepers USA Trust Preferred A Interests (held by the Debtors or otherwise), including any right to object to or seek to subordinate the Innkeepers USA Trust Preferred A Interests, thereby saving the Debtors estates the significant administrative costs associated with litigating that issue.
85 K&E 19103759 173. In varying ways, all of the beneficiaries of the Third Party Release have made significant contributions to the Debtors estates. 172 As such, the Debtors believe the Third Party Releases satisfy Metromedias substantial consideration prong. b. The Third Party Releases Enjoin Claims that Would Indirectly Impact the Debtors Reorganization Through Indemnity Obligations. 173
174. Another applicable Metromedia factor is whether the Third Party Releases operate to enjoin claims that would indirectly impact a debtors reorganization by way of indemnity or contribution. Here, the Third Party Releases preclude the pursuit of actions against the Debtors directors and officers that would trigger indemnity obligations by the Debtors estates, potentially creating substantial liabilities. The Grand Prix Acquisition Trust Amended and Restated Declaration of Trust (the Declaration of Trust) and the Grand Prix Acquisition Trust Bylaws (the Bylaws) 174 the operative organization documents for Innkeepers USA Trustcreate an indemnity obligation in favor of the directors and officers of Innkeepers USA Trust for any claim or liability to which such director or officer may become subject, in his capacity as such, excluding only acts or omissions (a) committed in bad faith or that were the result of active and deliberate dishonesty, (b) resulting in an improper personal benefit in money, property, or services, or (c) such director or officer had reasonable cause to believe were unlawful. 175 The costs associated with such actions would drain value from stakeholders and
172 The substantial consideration provided by the Debtors directors and officers and Apollo to the Debtors estates is discussed in Section II.B.3 below. 173 See Beilinson Decl. 64. 174 The Declaration of Trust and the Bylaws are attached hereto as Exhibit A and Exhibit B, respectively. 175 Declaration of Trust, Article IX.3 states as follows: The Trust, to the maximum extent permitted by Maryland law in effect from time to time, shall indemnify and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former Shareholder, Trustee or officer of the Trust or (b) any individual who, while a Trustee of the Trust and at the request of the Trust, served or has served as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such
86 K&E 19103759 hold up creditor distributions until the Debtors potential liabilities in connection with their indemnification obligations can be liquidated. These setbacks are precisely the problems the Third Party Releases are designed to prevent. Accordingly, the Debtors respectfully submit the Third Party Releases satisfy Metromedias indirect impact prong. c. The Third Party Releases Are Effectively Consensual. 176
175. The last of the applicable Metromedia factors is consent of the affected creditors. The Third Party Releases are almost entirely consensual. The vast majority of interested partiesincluding all secured creditors, nearly all unsecured creditors, and nearly all holders of Innkeepers USA Trust Preferred C Interests who votedvoted in favor of the Plan and the releases contained therein. Specifically, of the creditors and interestholders that cast a vote, approximately 99.2% of Fixed/Floating unsecured creditors, 100% of Anaheim unsecured creditors, approximately 99.98% of Ontario unsecured creditors, approximately 99.5% of
person may become subject or which such person may incur by reason of his status as a present or former Shareholder, Trustee or officer of the Trust. See Exhibit A, attached hereto. Bylaws, Article X states as follows: To the maximum extent permitted by Maryland law in effect from time to time, the Trust, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall indemnify (a) any Trustee, officer or shareholder or any former Trustee, officer or shareholder (including among the foregoing, for all purposes of this Article X and without limitation, any individual who, while a Trustee, officer or shareholder and at the express request of the Trust, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, shareholder, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of service in such capacity, against reasonable expenses incurred by him in connection with the proceeding, (b) any Trustee or officer or any former Trustee or officer against any claim or liability to which he may become subject by reason of such status unless it is established that (i) his act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) he actually received an improper personal benefit in money, property or services or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful and (c) each shareholder or former shareholder against any claim or liability to which he may become subject by reason of such status. See Exhibit B, attached hereto. The operative organizational documents of Innkeepers USA Trusts Debtor-subsidiaries contain substantially similar indemnification provisions. 176 See Beilinson Decl. 66-80.
87 K&E 19103759 Remaining Debtors unsecured creditors, 177 and approximately 95.9% of the shares of Innkeepers USA Trust Preferred C Interests (in terms of amount) voted in favor of the Plan. 176. The few objections to the Third Party Releases were made on behalf of the holders of Innkeepers USA Trust Preferred C Interests. Such holders are properly subdivided into four separate categories: (a) members of the Ad Hoc Committee; (b) holders of Innkeepers USA Trust Preferred C Interests who are not part of the Ad Hoc Committee and voted to accept the Plan; (c) holders of Innkeepers USA Trust Preferred C Interests who are not part of the Ad Hoc Committee and did not vote; and (d) holders of Innkeepers USA Trust Preferred C Interests who are not part of the Ad Hoc Committee and voted to reject the Plan. It is, therefore, important to consider each subset individually. ii. Members of the Ad Hoc Committee 177. The Ad Hoc Committee supports the Plan and expressly consents to the Third Party Releases. 178 Indeed, the Ad Hoc Committee Plan Support Letter states the Ad Hoc Committee has investigated potential claims for breaches of statutory and fiduciary duties against various parties, and that it has elected not to pursue litigation because it would be protracted, costly, and uncertain. 179
177 The few dissenting unsecured creditors in the Fixed/Floating Plan, Anaheim Plan, and Remaining Debtor Plan are appropriately bound by the Third Party Release as all are receiving substantial consideration under the Plan. General unsecured creditors in the Anaheim Plan and Remaining Debtor Plan are being paid in full and general unsecured creditors in the Fixed/Floating Plan are receiving, among other things, a distribution of $4.75 million. 178 In its letter in support of the Plan, attached to the Disclosure Statement Order [Docket No. 1441] as Exhibit 11 and included in all solicitation packages to Series C Preferred Shareholders (the Ad Hoc Committee Plan Support Letter), the Ad Hoc Committee stated as follows: Pursuant to the Plan, holders of preferred shares exchange releases with the debtors and non-debtor third-parties to achieve global peace, if and only if the Plan is not changed adversely to preferred shareholders and other conditions are satisfied. THE COMMITTEE SUPPORTS THE PLAN. (capitalization and emphasis in original). 179 See Ad Hoc Committee Plan Support Letter at p. 2 (From the Committees viewpoint, the alternative to the Plan is litigation. While the Committee believes it has meritorious and significant claims for breaches of
88 K&E 19103759 iii. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Voted in Favor of the Plan 178. Approximately 79.3% of holders of Innkeepers USA Trust Preferred C Interests are not represented by the Ad Hoc Committee. Approximately 95% of holders of Innkeepers USA Trust Preferred C Interests that voted accepted the Plan. As was made clear by extensive disclosure in both the Class R8 ballot and master ballot (as well as the Disclosure Statement), a vote in favor of the Plan is an affirmative indication of consent to the releases contained therein. The Class R8 ballots and master ballots, as well as the Disclosure Statement, contain the following language: The Plan contains a series of releases that are part of the overall settlement of various potential Claims and Interests. In that respect, if the Plan is confirmed, you will be a releasing party that both gives and receives releases as set forth in Article VIII of the Plan and Article V of the Disclosure Statement. Please be aware that your vote in favor of the Plan is an affirmative indication that you consent to the releases set forth therein. 180
179. Accordingly, these parties have consented to the Third Party Releases by virtue of their votes in favor of the Plan. iv. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Did Not Vote 180. Holders of Innkeepers USA Trust Preferred C Interests who are not members of the Ad Hoc Committee and abstained from voting have appropriately been deemed to have consented to the Third Party Releases. 181 The Disclosure Statement and the ballots contained clear, unambiguous language explaining the procedure for objecting to the releases contained in
statutory and fiduciary duties of many persons and entities, the litigation would be protracted and uncertain given the sophisticated entities involved. Therefore, the Committee has opted in favor of the Plan and urges you to support it.). 180 See Class R8 ballot at p. 2; Disclosure Statement at p. 19. 181 One East did not vote on the Plan. See Voting Report, Ex. B.
89 K&E 19103759 the Planvote to reject the Plan and timely file an objection to the Plan. The Disclosure Statement contained the following disclosure: If a Holder of Innkeepers USA Trust Preferred C Interests does not vote on the Plan at all, and the Bankruptcy Court confirms the Plan, such Holder will be deemed to have provided its consent to become a releasing party that both gives and receives releases as set forth in Article VIII of the Plan and Article V of this Disclosure Statement.If a Holder of Innkeepers USA Trust Preferred C Interests objects to the releases, such Holder should vote to reject the Plan and must file an objection to the Plan on or before the Objection Deadline (emphasis added). Similarly, the ballots and master ballots for holders of Class R8 Innkeepers USA Trust Preferred C Interests contain the following language: The Plan contains a series of releases that are part of the overall settlement of various potential Claims and Interests. In that respect, if the Plan is confirmed, you will be a releasing party that both gives and receives releases as set forth in Article VIII of the Plan and Article V of the Disclosure Statement. Please be aware that your vote in favor of the Plan is an affirmative indication that you consent to the releases set forth therein. If you do not vote on the Plan at all, and the Bankruptcy Court confirms the Plan, you will be deemed to have provided your consent to become a releasing party that both gives and receives releases as set forth in Article VIII of the Plan and Article V of the Disclosure Statement. If you vote to reject the Plan and the Plan is confirmed, you will be deemed a releasing party that gives and receives releases as set forth in Article VIII of the Plan and Article V of the Disclosure Statement. If you object to the releases, you should vote to reject the Plan and must file an objection to the Plan on or before the Objection Deadline. If you vote to reject and the Court does not confirm the Plan, you will not give or receive a release under the Plan. 181. Case law supports the concept of deemed consent. Specifically, the deemed consent concept has been enforced in analogous contexts where fulsome disclosure had been
90 K&E 19103759 made about the impact of declining to exercise a full and fair opportunity to register dissent or rejection. 182
182. Omni, the Debtors Notice and Claims Agent, expended a great deal of effort to ensure proper and comprehensive service to holders of Class R8 Innkeepers USA Trust Preferred C Interests. With regard to such holders, Omni researched the security position report provided by the Depository Trust Company and personally reached out to each brokerage nominee to ensure the plan solicitation was performed both timely and accurately. On May 19, 2011the date of entry of the Disclosure Statement Order, Omni contacted the 62 brokerage nominees (the Nominees) listed on the security position report by telephone and e-mail and (a) provided them with additional notice of the solicitation record date and electronic copies of the solicitation materials, (b) requested that they identify their proxy agents or the number of solicitation packages they required to service their represented beneficial owners, and (c) discussed their solicitation procedure requirements. On May 20, 2011, Omni caused the Solicitation Package to be served on all Nominees by first class mail. 183
183. Omni frequently communicated with Nominees to encourage timely distribution of solicitation packages to beneficial owners, as well as the return of ballots to Nominees (and subsequently to Omni). Omni confirmed ballots were distributed to beneficial owners, beneficial
182 See In re Teligent, Inc., 282 B.R. 765 (Bankr. S.D.N.Y. 2002) (holding that failure of administrative and priority creditors to return their consent forms implied their agreement to the debtors proposed treatment of their claims within the meaning of section 1129(a)(9) of the Bankruptcy Code where the creditors had only to check a box on the Consent Form, and mail it in a pre-addressed, stamped envelope, fax it to a toll free number, or e-mail the information to the address provided by the debtors); see also Canfield v. Van Atta Buick/GMC Truck, Inc., 127 F.3d 248, 24951 (2d Cir. 1997) (finding that companys former employee deemed to consent to dismissal of her claims against the company where company provided notice to employee that lack of response to summary judgment motion would amount to deemed consent of dismissal of claims and employee failed to respond); Q Tech. Inc. v. Allard (In re Trans-Indus., Inc.), Case No. 08-14655, 2009 WL 1259991 (E.D. Mich. May 1, 2009) (finding that recipient of fraudulent transfer not entitled to set aside default judgment after recipient failed to answer trustees complaint where recipient was warned that failure to respond to trustees complaint would be deemed recipients consent to entry of a default judgment). 183 See Voting Report, 10.
91 K&E 19103759 owners were returning valid ballots, and that master ballots would be prepared and returned before the Voting Deadline. In addition, Omni offered assistance to Nominees in coordinating and facilitating beneficial owner solicitation. Omni also reviewed draft master ballots in advance of the Voting Deadline to ensure Nominees correctly completed and timely submitted the master ballots. To the extent Omni discovered any beneficial owners had not received applicable solicitation materials, Omni promptly distributed the appropriate materials directly. As a result of these efforts, as provided in detail below, Omni succeeded in generating an impressive participation rate among holders of Innkeepers USA Trust Preferred C Interests. 184
184. Based on Omnis direct contact with the Nominees, Omni determined that Broadridge Financial Solutions (Broadridge) represented as proxy agent each of Ameriprise Financial, Barclays Capital Inc, BOA/GWIM, Brown Bros, Clearview Correspondent Services, Charles Schwab & Co Inc, Citigroup Global Markets Inc., David Lerner Associates Inc., D.A. Davidson & Co., Deutsche Bank Securites Inc., E*Trade Clearing LLC, First Clearing, LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing, L.P., Interactive Brokers LLC, Janney Montgomery Scott LLC, Edward D. Jones & Co., JP Morgan, JP Morgan Chase Bank/Correspondence Clearing Services, JP Morgan Chase Bank/Ia, LPL Financial, Merrill Lynch Sfkpg, Morgan Keegan & Co., Inc., National Financial Services LLC, Oppenheimer & Co Inc., Pension Financial Services Inc., Pershing, Pension Financial Services Inc., Primevest Financial Services, Inc., Robert W. Baird & Co. Inc., Raymond, James & Associates, Inc., RBC Capital Markets LLC, Scottrade Inc, SEI Private Trust Co., Stockcross Financial Services Inc., Stephens Inc., TD Ameritrade Clearing Inc., UBS Financial Services Inc., UBS Securities LLC, U.S. Bancorp Investments, U.S. Bank N.A., USAA Investment Management Company,
184 Id. at 11.
92 K&E 19103759 Vanguard, Wedbush Morgan Securities Inc., and Wells Fargo. Omni reached out on multiple occasions to Broadridge to obtain its individual Non-Objecting Beneficial Owners (NOBO) service parties list and its Objecting Beneficial Owners (OBO) service party package counts. Broadridge provided these list to Omni on May 25, 2011. 185
185. Omni served Solicitation Packages directly on the individual NOBO parties via first class mail and directly on Broadridge (with its required number of OBO Solicitation Packages) via overnight mail. Omni then communicated with Broadridge via telephone and e- mail on May 26, 2011 to ensure Broadridge processed the Solicitation Packages in a timely fashion. Omni then communicated with Broadridge via telephone and e-mail on June 3, 2011, June 9, 2011, June 13, 2011, June 15, 2011, and June 16, 2011 to confirm Broadridge was following up with beneficial owners to collect and process ballots and to ensure they would return all applicable Master Ballots prior to the Voting Deadline. The ballots received and tabulated from Broadridge are listed on Exhibit B to the Voting Report. 186
186. Also based on Omnis repeated direct contact with the Nominees, Omni determined the following Nominees were not represented by Broadridge as their proxy agent: Legent Clearing LLC, Stifel, American Enterprise Investment Services Inc, Bank Of New York, BMO Nesbitt Burns Inc, JJB Hilliard, WL Lyons Inc, Mellon Private Wealth, Morgan Stanley & Co. Incorporated, Morgan Stanley Smith Barney, Northern Trust Company, RBC Dominion Securities, Inc., State Street Bank And Trust Company, State Street Wealth Management Services, Sterne Agee & Leach Inc., TD Waterhouse Canada Inc., and Huntington National Bank (collectively, the Non-Broadridge Nominees). After Omnis initial communications on May 19, 2011 and the successful service of the Plan Solicitation Packages to the Non-Broadridge
185 Id. at 12. 186 Id. at 13.
93 K&E 19103759 Nominees on May 20, 2011, Omni provided additional Solicitation Packages as requested by individual Non-Broadridge Nominees. Omni further communicated with Non-Broadridge Nominees via telephone and e-mail on May 26, 2011, June 3, 2011, June 9, 2011, June 13, 2011, June 15, 2011, and June 16, 2011 to ensure the Non-Broadridge Nominees processed their Solicitation Packages in a timely manner and were following up with their beneficial owners to collect and process ballots, and also to make sure master ballots were returned prior to the Voting Deadline. The ballots received and tabulated from the Non-Broadridge Nominees are listed on Exhibit B to the Voting Report. 187
187. According to the security position report from Computer Share, the Debtors stock transfer agent, there were 5,800,000 outstanding securities of Class R8 Innkeepers USA Trust Preferred C Interests at the time of solicitation. Between the Broadridge Nominees and the Non-Broadridge Nominees, Omni served approximately 2,210 Solicitation Packages to the Holders of Class R8 Innkeepers USA Trust Preferred C Interests, which included direct service to 1,355 NOBO parties and indirect service to 855 parties via their Nominees. Prior to the Voting Deadline, approximately 497 Class R8 Ballots representing 2,584,668 shares were received. The ballots received represent 22.5% of the solicitation packages served and 44.6% of the outstanding interests. As stated in the Voting Report, in Omnis extensive experience with ballot solicitations, the overall ballot and interest return percentages represent a significantly higher rate of return than average ballot solicitations. 188
188. Given the extensive disclosures in the ballot, the master ballot, and the Disclosure Statement, the extraordinary efforts of Omni to ensure thorough solicitation, and the particularly
187 Id. at 14. 188 Id. at 15
94 K&E 19103759 high voting participation by holders of Innkeepers USA Trust Preferred C Interests, it is appropriate for the Court to find that such holders have consented to the Third Party Releases. v. Holders of Innkeepers USA Trust Preferred C Interests Who Are Not Ad Hoc Committee Members and Voted Against the Plan. 189. There is a limited group of holders of Innkeepers USA Trust Preferred C Interests holding approximately 104,130 shares that are not part of the Ad Hoc Committee and that have voted to reject the Plan (the Rejecting Series C Holders). As described above, the Debtors recently resolved the U.S. Trustees objection to confirmation by agreeing that the Rejecting Series C Holders would not provide a release to, or receive a release from Apollo. As explained herein, the Debtors satisfy the Metromedia standard and, therefore, the Court should approve the Third Party Releases. 189
3. The Objection to the Third Party Releases Should Be Overruled. 190. One East 190 has objected to confirmation of the Plan on grounds that certain of the Third Party Releases render the Plan unconfirmable. One Easts objection focuses primarily on the non-consensual release by the Rejecting Series C Holders of claims against Apollo, claiming that such releases do not comply with the Metromedia standard. 191 The Debtors respectfully
189 It is common for courts in the Southern District of New York to approve non-consensual third party releases when merited. See, e.g., In re Tronox, Inc., Case No. 09-10156 (Bankr. S.D.N.Y. Nov. 30, 2010); In re ION Media Networks, Inc., Case No. 09-13125 (Bankr. S.D.N.Y. Dec. 2, 2009); In re Charter Commcns, Inc., Case No. 09-11435 (Bankr. S.D.N.Y. Nov. 17, 2009). 190 One East Objection 2037. The LNR Objection also objected to the Third Party Releases. 191 One Easts objection also asserts the Bankruptcy Court lacks subject matter jurisdiction to grant the Remaining Debtor Releases because the release does not relate to property of the Debtors estates. This objection is misplaced. Besides being an integral element of the Plan consideration, the Third Party Releases protect the property of the Debtors estates by preventing third parties from pursuing actions that would implicate the Debtors directors and officers, thereby triggering value-draining indemnification obligations and holding up creditor distributions until potential liabilities can be liquidated. One East also argues that Apollos Innkeepers USA Trust Preferred A Interests should be subordinated to the Innkeepers USA Trust Preferred C Interests. One East Objection 511. The One East Objection fails to support its position with any relevant facts or law. Indeed, the One East Objection does not even cite to section 510(c) of the Bankruptcy Code, which governs equitable subordination, let alone set forth why such
95 K&E 19103759 submit that the resolution of the U.S. Trustees objection should also resolve the One East objection as it relates to the Apollo release. 191. One East also objects to the non-consensual release of the Rejecting Series C Holders of claims against the Debtors directors and officers, arguing the Third Party Releases improperly deprive One East of allegedly valuable LBO Claims against the Debtors directors and officers arising out of the Acquisition. 192
192. Despite One Easts assertions to the contrary, the Third Party Releases including the Rejecting Series C Holders release of the Debtors directors and officers and Apollo contained in the Remaining Debtor Releasecomply with the Metromedia standard. 193. The Remaining Debtor Release is supported by substantial consideration provided by both the Debtors directors and officers and Apollo. Indeed, Apollo has provided substantial consideration to the Debtors estates. First, Apollo is providing substantial contributions to the Remaining Debtors Plan by supporting the Ad Hoc Committee Administrative Claima payment that reduces Apollos potential recovery as holders of 100% of the equity interests in Grand Prix Holdings by approximately $1.4 million. 193 By doing so, Apollo enabled the Debtors to avoid contentious litigation with the Ad Hoc Committee and save the substantial costs
subordination is warranted in this case. Accordingly, the Debtors respectfully request the Court deny this baseless and unsupported request. 192 As discussed above in Section II.B.1.c, the Debtor, the Creditors Committee, and the Ad Hoc Committee have thoroughly investigated the possibility of such LBO Claims, and all parties have opted against pursuing any such potential claims. 193 For illustrative purposes only, given the approximate amount of the liquidation preferences and accrued dividends through March 2011 on the Innkeepers USA Trust Preferred C Interests and Innkeepers USA Trust Preferred A Interests, and the fact that the Innkeepers USA Trust Preferred C Interests and Innkeepers USA Trust Preferred A Interests are pari passu in priority, the $3.5 million Ad Hoc Committee Administrative Claim will be born approximately 60% out of the recovery available for Innkeepers USA Trust Preferred C Interests (i.e., $2.1 million) and 40% out of the recovery available for Apollo and other creditors with a claim against the Innkeepers USA Trust Preferred A Interests (i.e., $1.4 million). In other words, of the combined amount of liquidation preferences and accrued dividends as of March 2011 (approximately $289 million), 60% relates to the Innkeepers USA Trust Preferred C Interests (liquidation preference of $145 million and approximately $28.l million of accrued dividends) and 40% relates to the Innkeepers USA Trust Preferred A Interests ($75 million and approximately $40.8 million of accrued dividends).
96 K&E 19103759 associated therewith. Consensus is a primary goal of Chapter 11 and Apollos agreement to support the Ad Hoc Committee Administrative Claim advanced that goal. 194. Second, Apollo is providing substantial contributions to the Fixed/Floating Plan, including a $375,000 payment to the Fixed/Floating general unsecured claim fund, despite receiving less than a global release in exchange for the contribution. When the Remaining Debtors split off into a separate Planthereby reducing the scope of the releases in the Fixed/Floating Planrather than opting against a contribution, which would have been within its rightsApollo committed to making the $375,000 payment. Apollos actions preserved consensus with respect to the Fixed/Floating Plan and helped pave the path for the massively successful auction for the LNR Properties encapsulated in the Remaining Debtor Plan. 195. The Debtors directors and officers likewise provided substantial consideration to the Debtors estates. Indeed, throughout these Chapter 11 Cases, the Debtors directors and officers have been integral in preservingand even substantially increasingthe value of the Debtors estates. And One Easts unsupported allegations to the contrary are not credible. 196. First, the Debtors management helped ensure the Company would be able to sufficiently fund the PIPs and other required capital expenditures on Marriott-branded hotel properties to secure Marriotts support throughout the restructuring process. Such support was and continues to be critical to preserving estate value. 197. Second, recognizing the need to deleverage the Debtors balance sheet and create additional cash flows necessary to satisfy PIP and other obligations, the Debtors management engaged in months of negotiations with Lehman to persuade Lehman to accept a debt-for-equity transaction.
97 K&E 19103759 198. Third, the Debtors operational performance has exceeded expectations throughout these Chapter 11 Cases. This is a direct result of the Debtors management team maintaining their efforts to cut costs and focus on ensuring the uninterrupted operation of the Debtors business through the bankruptcy filing. 199. Fourth, since the filing, the Debtors directors and officers have worked hard to ensure the Debtors continue to comply with the key agreements with Marriott and Lehman negotiated prepetition. As described above, these agreements are largely responsible for unlocking the substantial value received as a result of the marketing and sale process. 200. Fifth, the Debtors directors and officers ran the extensive marketing process described above. The Independent Committee of the Board and the full Board conferred numerous times to formulate a successful sale process, including determining the selection of the best stalking horse bidder. And the Debtors directors and officers spent countless hours negotiating with and responding to diligence requests from various potential bidders creating a competitive tension that served to increase the value of bids ultimately submitted. Put simply, One Easts assertions that the Debtors directors and officers did not provide substantial consideration to the Debtors estates are baseless. 201. Moreover, in addition to complying with the law generally, the Third Party Releases are demonstrably equitable under the specific circumstances of these Chapter 11 Cases. The Ad Hoc Committeewhich has been actively and intimately involved in these Chapter 11 Cases and is comprised of Series C Preferred Shareholderssupports the Plan and the Third Party Releases contained therein. The Disclosure Statement and the applicable ballot and master ballot included fulsome, unambiguous disclosure as to the nature of the releases and the procedure for objection to their propriety. And the Plancomplete with its Third Party
98 K&E 19103759 Releaseshas been embraced by the vast majority of the Debtors stakeholders, including the overwhelming majority of holders of Innkeepers USA Trust Preferred C Interests who voted on the Plan. 202. For these reasons, the Debtors respectfully submit the Objections to the Plans release provisions should be overruled. C. The Plans Exculpation and Injunction Provisions Are Appropriate and Should Be Approved. 1. The Exculpation Provision Should Be Approved. 194
203. Under Article VIII.I of the Plan, the Debtors seek protection for the Exculpated Parties (which are the same as the Releasing Parties) from liability for actions taken or omitted pre- or postpetition in connection with or related to formulating, negotiating, preparing, disseminating, implementing, administering, confirming, or effecting the Effective Date of the Plan, the Disclosure Statement, or any contract, instrument, release, or other agreement or document created or from dissatisfied creditors or any other parties in interest with respect to the Exculpated Parties participation in these Chapter 11 Cases (the Exculpation Provision). The scope of the exculpation contained in Article VIII.I of the Plan is appropriately limited to the Exculpated Parties participation in these Chapter 11 Cases, has no effect on liability that results from gross negligence or willful misconduct, and does not apply to any acts or omissions expressly set forth in and preserved by the Plan. 204. There are a number of strong policy considerations that weigh heavily in favor of exculpatory clauses in chapter 11 plans. Notably, courts have ruled exculpation provisions do not affect the liabilities of third parties, but merely set forth the appropriate standard of liability
194 See Beilinson Decl. 81.
99 K&E 19103759 for the exculpated parties. 195 Courts have found exculpation provisions appropriate where, as here, they do not extend to gross negligence and willful misconduct. 196 Courts evaluate the appropriateness of exculpation provisions based upon a number of factors, including whether the Plan was proposed in good faith, whether liability is limited, and whether the exculpation provision was necessary for plan negotiations. 197 For the reasons set forth below, the Exculpation Provision is appropriate and the Court should approve it. 205. As an initial matter, to confirm the Plan, the Court must find, among other things, that the Plan has been proposed in good faith and not by any means forbidden by law. 198
Findings that the Plan was proposed and negotiated in good faith extend to the parties involved in the negotiations. Thus, if the Court confirms the Plan, cause exists to approve the Exculpation Provisions. 206. Moreover, it is well established that the liability of statutory committees and their professionals retained under section 1103 of the Bankruptcy Code is limited to acts of gross negligence and willful misconduct. 199 Finally, exculpation for participating in the plan process is appropriate where plan negotiation could not have occurred without protection from liability. 200
195 In re PWS Holding Corp., 228 F.3d 224, 245 (3d Cir. 2000) (the exculpation provision, which is apparently a commonplace provision in Chapter 11 plans, does not affect the liability of [third] parties, but rather states the standard of liability under the Code). 196 See Upstream Energy Servs. v. Enron Corp. (In re Enron Corp.), 326 B.R. 497, 501 (S.D.N.Y. 2005) (exculpation provision was appropriate where such provision excluded gross negligence and willful misconduct). 197 See, e.g., Captran Creditors Trust v. McConnell (In re Captran Creditors Trust), 128 B.R. 469, 476 (M.D. Fla. 1991) (the factors used to evaluate the language of an exculpation provision include, but are not limited to: how the exculpatory clause limits liability, intent of the parties, and the manner in which the exculpatory clause was made a part of the agreement). 198 11 U.S.C. 1129(a)(3). 199 See In re Calpine Corp., Case No. 05-60200, 2007 WL 4565223, at *10 (Bankr. S.D.N.Y. Dec. 19, 2007) (finding that exculpation provisions that do not relieve any party of liability for gross negligence or willful misconduct found to be appropriate); Enron Corp., 326 B.R. at 501 (noting that the bankruptcy court had addressed the exculpation provision, finding it appropriate because it excluded gross negligence and willful misconduct); PWS Holding, 228 F.3d at 246-47 (holding that the appropriate standard of liability under section
100 K&E 19103759 207. The Exculpated Parties should be exculpated for acts in connection with the Chapter 11 Cases, other than those acts involving willful misconduct or gross negligence, as a matter of public policy. Indeed, failing to include an exculpation clause such as the Exculpation Provision in a plan of reorganization would chill the critical participation of the management and the advisors to debtors in possession, as well as essential creditor groups, in the process of trying to formulate and negotiate consensual chapter 11 plans. In light of the bankruptcy policy in favor of consensual chapter 11 plans and the negotiations that create them, it stands to reason that exculpation provisions are essential to the process and should be approved. 201
208. The Exculpated Parties played a critical role in the formulation of the Plan, and the Exculpation Provision played a role in bringing these parties to the table. Moreover, the scope of the Exculpation Provision itself and the composition of the Exculpated Parties are entirely consistent with established practice in this and other jurisdictions. 202
1103 of the Bankruptcy Code is willful misconduct or ultra vires acts, and approving an exculpation of the Creditors Committee and its professionals subject only to liability for willful misconduct or gross negligence). 200 See Enron Corp., 326 B.R. at 503 (excising similar exculpation provisions would tend to unravel the entire fabric of the Plan, and would be inequitable to all those who participated in good faith to bring it into fruition); see also In re Winn-Dixie Stores, Inc., 356 B.R. 239, 261 (Bankr. M.D. Fla. 2006) (holding exculpation provision was appropriate where beneficiaries expected such provision to be included in chapter 11 plan in exchange for participation in the chapter 11 cases); Worldcom, 2003 WL 23861928, at *28 (exculpation provision was appropriate when its inclusion in the plan was vital to the successful negotiation of the plan). 201 See In re Jartran, Inc., 44 B.R. 331, 363 (Bankr. N.D. Ill. 1984) (the spirit of Chapter 11 [is] to promote consensual plans); see also Zenith, 241 B.R. at 105 (stating that the Bankruptcy Code has an overall policy of fostering consensual plans of reorganization); In re Homestead Partners, Ltd., 197 B.R. 706, 710 (Bankr. N.D. Ga. 1996) (the development of consensual reorganizations lies at the heart of Chapter 11 policy); In re Pub. Serv. Co. of N.H., 88 B.R. 521, 539-40 (Bankr. D.N.H. 1988) (it is a strong policy underlying chapter 11 of the Bankruptcy Code to foster consensual plans). 202 See, e.g., In re DJK Residential LLC, No. 08-10375 (Bankr. S.D.N.Y. May 7, 2008); In re Calpine Corp., No. 05-60200 (Bankr. S.D.N.Y. Dec. 19, 2007); Source Enters., 2007 WL 2903954, at *13 (approved exculpation provision because provision was in the best interests of the debtors estates and the creditors); Bally Total Fitness, 2007 WL 2779438, at *8 (finding that the exculpation, release, and injunction provisions appropriate because they were fair and equitable, necessary to successful reorganization, and integral to the plan); Oneida, 351 B.R. at 94 n.22 (in overruling objection to exculpation clause, court noted that exculpation language that generally follows the text that has become standard in this district, is sufficiently narrow to be unexceptionable).
101 K&E 19103759 209. In spite of the foregoing, One East has objected to the Exculpation Provision as overly broad. 203 One East asserts the Exculpation Provisions inclusion of prepetition acts taken or omitted in connection with or in contemplation of the restructuring of the Debtors is unusual and highly inappropriate. 204 This is inaccurate. As an initial matter, One East cites no authority in support of its assertion that including prepetition activity in an exculpation provision is inappropriate. One East also suggests the Exculpation Provision acts as another form of release. 205 This statement exemplifies One Easts misunderstanding of both the purpose and effect of an exculpation provision: such a provision does not affect the liability of the [exculpated] parties, but rather states the standard of liability under the Code by setting a standard of care of gross negligence or willful misconduct in future litigation against an Exculpated Party for acts arising out of the Debtors restructuring. 206 Far from unusual, the Exculpation Provision contains language that is routinely approved by Bankruptcy Courts in the Southern District of New York. 207
210. The Debtors, therefore, respectfully request that the Court overrule One Easts objection and approve the Exculpation Provision set forth in Article VIII.I of the Plan.
203 One East Objection 3839. 204 Id. 205 Id. at 39. 206 PWS Holding, 228 F.3d at 246. 207 See Oneida, 351 B.R. at 79, n. 2 (overruling objection to exculpation provision that argued such exculpation provision was [u]nlike the exculpation clauses in most plans and where such provision covered claims relating to any pre-petition or post-petition act or omission in connection with, or arising out of the debtors restructuring, and noting that the language of the clause . . . generally follows the text that has become standard in this district); see also In re Neff Cop., Case No. 10-12610 (Bankr. S.D.N.Y. Sept. 21, 2010); In re Citadel Broad. Corp., Case No. 09-17442 (Bankr. S.D.N.Y. May 19, 2010); In re The Readers Digest Assn, Case No. 09-23529 (Bankr. S.D.N.Y. Jan. 19, 2010); In re ION Media Networks, Inc., Case No. 09-13125 (Bankr. S.D.N.Y. Dec. 3, 2009); In re DBSD N. Am., Inc., Case No. 09-13061 (Bankr. S.D.N.Y. Nov. 23, 2009); In re Charter Commcns, Inc., Case No. 09-11435 (Bankr. S.D.N.Y. Nov 17, 2009).
102 K&E 19103759 2. The Injunction Provision Is Appropriately Tailored to Implement the Plan. 208
211. Article VIII.J of the Plan enjoins all Entities from commencing or continuing any Causes of Action released pursuant to the Plan or Confirmation Order. The injunction is necessary to effectuate the releases contained in the Plan and to protect the reorganized Debtors from any potential litigation from prepetition creditors as they implement the provisions of the Plan after the Effective Date. Any such litigation would hinder the efforts of the reorganized Debtors to fulfill their responsibilities effectively as contemplated in the Plan and thereby undermine the Debtors efforts to maximize value for all holders of claims and interests. The Debtors narrowly tailored the injunction to achieve its purpose and similar injunctions have been approved by courts in other chapter 11 cases. 209
212. Nevertheless, One East also objected to the inclusion of certain Releasing Parties in the Plans injunction provision. 210 As discussed above, the Debtors estates received substantial consideration from the Releasing Parties in exchange for the Third Party Releases and exculpation, and both provisions are appropriate in their entirety. The injunction enforces these provisions. And the injunction is a key component of the ultimate reorganization. 211
Accordingly, to enable the reorganized Debtors to comply with their obligations under the Plan and applicable related documents, the Debtors request the Court overrule One Easts objection and approve the injunction provision contained in Article VIII.J of the Plan.
208 See Beilinson Decl. 82. 209 See, e.g., In re DJK Residential LLC, No. 08-10375 (Bankr. S.D.N.Y. May 7, 2008); In re Calpine Corp., Case No. 05-60200 (Bankr. S.D.N.Y. Dec. 19, 2007); Bally Total Fitness, 2007 WL 2779438, at *8 (finding that the exculpation, release, and injunction provisions appropriate because they were fair and equitable, necessary to successful reorganization, and integral to the plan). 210 One East Objection 4042. 211 See Drexel Burnham Lambert, 960 F.2d at 293.
103 K&E 19103759 D. The Employee Emergence Payments Are Appropriate and Should Be Approved. 213. The Plan provides for employee compensation payments in the aggregate amount of $4 million to certain members of the Debtors management and key employees (collectively, the Employee Incentive Payments). 212 The Employee Incentive Payments are comprised of two parts: a $3.5 million payment to be made by the Fixed/Floating Plan Sponsors to certain members of the management team and other employees on the Effective Date of the Fixed/Floating Plan in amounts that will be determined in the sole discretion of the current board of Innkeepers USA Trust (the Fixed/Floating Employee Incentive Payment); and a $500,000 compensation program for the Debtors general counsel related to his efforts to consummate the sale of the assets of the Remaining Debtors (the Remaining Debtor Management Incentive Payment). 214. Information related to the Employee Incentive Payments was described in the Disclosure Statement and Plan filed on May 19, 2011 and included in more detail in the Amended Exhibit F of the Plan Supplement filed on June 22, 2011. 213 The following paragraphs provide additional information. 215. The $4 million aggregate amount to be paid under the Employee Incentive Payments originated in the emergence costs schedule that the Debtors shared with bidders prior to and at the auctions that took place on May 2 and 3, 2011. In that emergence cost schedule, the Debtors estimated that there would be approximately $3.4 million in employee emergence costs attributable to the Fixed/Floating Debtors and approximately $600,000 in employee emergence costs attributable to the Remaining Debtors.
212 See Plan at Art. IV.J. 213 See Plan Supplement, Ex. F. Amended Exhibit F to the Plan Supplement resolves Lehmans objection to the Employee Incentive Payments.
104 K&E 19103759 216. As part of their final bid, the Fixed/Floating Plan Sponsors agreed to fund $3.5 million of Employee Incentive Payments on the Effective Date of the Fixed/Floating Plan as directed by the Board. 217. Subsequent to the Auction, the Board met to discuss a compensation program with respect to the employee incentive costs attributable to the Remaining Debtors. The Debtors determined that it was appropriate to implement a compensation program that would incentivize the Debtors general counsel with a payment of $500,000 on the Effective Date if the Chatham Hotel Sale Transaction is consummated consistent with the terms and conditions of the Chatham APA. 218. Section 1129(a)(4) of the Bankruptcy Code requires that any payment made or to be made by the proponent, by the debtor . . . for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. 214 The Debtors respectfully submit that the Employee Incentive Payments are appropriate and respectfully request that they be approved. 219. With respect to the Fixed/Floating Employee Incentive Payment, the $3.5 million to be paid by the Fixed/Floating Plan Sponsors to the management team members and employees selected by the Board is reasonable as it is being paid by a sophisticated third-party purchaser, not from estate assets. 215 Notably, no party raised an objection to the Fixed/Floating Employee Incentive Payment.
214 11 U.S.C. 1129(a)(4). 215 See, e.g., In re Journal Register Co., 407 B.R. 520, 520 (Bankr. S.D.N.Y. 2009), citing Mabey v. Southwestern Elec. Power Co. (In re Cajun Elec. Power Coop., Inc.), 150 F.3d 503, 517 (5th Cir. 1998), cert. denied, 526 U.S. 1144 (1999) (In the typical case, payments that are not payable from, or reimbursable by, the bankruptcy estate should not engender anything like the judicial scrutiny devoted to those that are payable out of the bankruptcy estate.); Official Comm. of Unsecured Creditors v. airway Indus., Inc. (In re Airway Indus., Inc.),
105 K&E 19103759 220. With respect to the Remaining Debtor Management Incentive Payment, the Debtors respectfully submit that the compensation program is also appropriate and reasonable within the confines of 1129(a)(4). Mark Murphy, the recipient of the Remaining Debtor Management Incentive Payment, is integral to the consummation of the Chatham Hotel Sale Transaction. Specifically, he is responsible for overseeing compliance with the Chatham APA, negotiating and reviewing documents necessary to close the Chatham Hotel Sale Transaction, and other key tasks necessary to consummate the transactions contemplated by the Remaining Debtor Plan. 216 Mr. Murphys role in connection with these responsibilities will increase due to the resignation of the Debtors chief executive officer, Timothy J. Walker, on the Confirmation Date. 217 It is expected that Mr. Walker will be employed by Island Hospitality Management, Inc. (IHM), the current and future property manager of substantially all of the Debtors hotels. It is clear that IHM will not retain the services of Mr. Murphy upon the completion of these Chapter 11 Cases. Therefore, it is appropriate to incentivize him to continue his hard work with respect to closing the Chatham Sales Transactions. 218
221. The Employee Incentive Payments are widely supported (or have not been the subject of objection) by the Debtors stakeholders, including the Debtors unsecured creditors and secured creditors and the Ad Hoc Committee. The Debtors stakeholders who are impacted by the Employee Incentive Payments were afforded the opportunity to voice their opinion through ballot and/or objection. The overwhelming votes in favor of the Plan and lack of
354 B.R. 82, 87 (W.D. Pa. 2006) (holding that section 503(c) did not apply because the incentive bonus was being paid by the purchaser out of its own funds and thus such payment did not constitute an administrative expenses to be paid from the debtors estate). 216 Kleisner Decl. 10. 217 Id. 218 Id.
106 K&E 19103759 objection signal such parties support for the Employee Incentive Payments. In fact, the only objection to the Employee Incentive Payments, which was raised by Lehman with respect to the Remaining Debtor Management Incentive Payment, has been resolved. 222. While section 503(c) arguably does not apply to payments made to management on or after the Effective Date, the Debtors nevertheless believe that the Remaining Debtor Management Incentive Payment complies with the section 503(c) standards. Specifically, section 503(c)(1) provides that there shall neither be allowed, nor paid . . . a transfer made to, or an obligation incurred to the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the business unless specific conditions are satisfied. 219 The Remaining Debtor Management Incentive Payment is not merely predicated on exiting bankruptcy in a timely manner without regard to the financial state of the business. Instead, the Remaining Debtor Management Incentive Payment will only be paid if the Chatham Sales Transaction is closed within the timeframe outlined in the Chatham APA. The principal purpose of the Remaining Debtor Management Incentive Payment is not to induce Mr. Murphy to remain with the Debtors through the Effective Date; it is to incentivize his performance to facilitate closing the transactions necessary to consummate the Remaining Debtor Plan. 220 Therefore, the Remaining Debtor Management Incentive Payment does not implicate section 503(c)(1). 221
219 See 11 U.S.C. 503(c)(1). 220 Kleisner Decl. 10. 221 See Journal Register, 407 B.R. at 536 (finding that where the principal purpose of a plan is not to induce participating employees to remain with the Debtors section 503(c)(1) does not apply); In re Dana Corp., 358 B.R. 567, 571, 575-77 (Bankr. S.D.N.Y. 2006) (concluding that incentivizing plans with some components that arguably have a retentive effect do not necessarily violate section 503(c) (emphasis in original)); see also In re Neff Corp., Case No. 10-12610 (SCC) (Bankr. S.D.N.Y. Sept. 21, 2010) (this Court approved an incentive program where the debtors chief restructuring officer and chief executive officer received bonuses based on the timing of emergence, and the program was not considered retentive in nature under section 503(c)).
107 K&E 19103759 223. Likewise, section 503(c)(2) does not apply to payments under the Remaining Debtor Management Incentive Payment because such payments are not severance payments or otherwise triggered by the termination of Mr. Murphys employment. 222
224. Lastly, the Debtors believe that the requirements of section 503(c)(3), to the extent such requirements are applicable to the Remaining Debtor Management Incentive Payment, are satisfied. Section 503(c) only applies to limit the allowance as an administrative expense of transfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of, officers, managers or consultants hired after the date of filing the petition. 223 Transfers made to employees outside of the ordinary course have been judged by some courts under a business judgment standard. 224 As described above, the Remaining Debtor Management Incentive Payment is justified by the facts and circumstances as Mr. Murphys services are needed to ensure the consummation of the Chatham Sale Transaction, which will in turn fund distributions under the Remaining Debtor Plan. 225. The Remaining Debtor Management Incentive Payment is consistent with the policies underlying chapter 11. As Judge Glenn states in Borders, While an expeditious emergence from bankruptcy via a confirmed reorganization plan is the ultimate objective of most chapter 11 debtors, a section 363 going concern sale also achieves the chapter 11 goal of
222 See 11 U.S.C. 503(c)(2) (setting certain limitations on the allowance of a severance payment to an insider as an administrative expense); see also Straus-Duparquet, Inc. v. Local Union No. 3, IBEW, 386 F.2d 649, 651 (2d Cir. 1967), cited in Journal Register, 407 B.R. at 536 (holding that section 503(c)(2) did not apply to incentive plan payments not triggered by a termination of employment event, as is normally the case with severance payments). 223 11 U.S.C. 503(c)(3). 224 See, e.g., Dana Corp., 358 B.R. at 576 (holding that the test in section 503(c)(3) appears to be no more stringent a test than the one courts must apply in approving any administrative expense under section 503(b)(1)(A) . . . an actual, necessary cost or expense of preserving the estate).
108 K&E 19103759 preserving businesses. 225 Indeed, employee incentive programs have been routinely approved in this district and others in the context of section 363 sales. 226 In the Debtors cases, there is an approved sales transaction for the Remaining Debtor Hotels that is widely supported by all parties. In order to achieve the successful resolution of the Remaining Debtors cases and to consummate the Remaining Debtor Plan, the Debtors require the continued hard work and focus of Mr. Murphy to implement the transactions contemplated by the Chatham Sale Transaction. The Debtors determined that the Remaining Debtor Management Incentive Payment is an appropriate means to achieve this result. E. The Ad Hoc Committee Agreement is Appropriate and Should Be Approved in Its Entirety. 227
226. As described above, the Ad Hoc Committee supports the Plan. Section IV.AA of the Plan provides a $3.5 million payment to the members of the Ad Hoc Committee (the Ad Hoc Committee Payment) in the Remaining Debtor Plan. The Remaining Debtor Plan has the support of the Creditors Committee, LNR, Marriott, 98% of the unsecured creditors at the Remaining Debtors (other than Grand Prix Holdings), and 96% of holders of Innkeepers USA Trust Preferred C Interests who voted on the Plan. The only parties that have objected to the Ad Hoc Committee Payment are Midland, Lehman, and One East (a holder of Innkeepers USA Trust Preferred C Interests that thinks it should also be entitled to share in the Ad Hoc Committee
225 Borders Group, Inc., 2011 Bankr. LEXIS 1537. 226 See, e.g., id; In re Terrestar Networks Inc., Case No. 10-15446 (SHL) (Bankr. S.D.N.Y. Feb. 23, 2011) (approving incentive bonus plan which is contingent upon the consummation of a sales transaction involving substantially all of the debtors' assets); In re Neff Corp., Case No. 10-12610 (SCC) (Bankr. S.D.N.Y. Sept. 21, 2010) (key employee incentive program approved as part of confirmed plan of reorganization with grants tied to emergence bonuses for senior executives); In re Flying J Inc., Case No. 08-13384 (MFW) (Bankr. D. Del. May 7, 2009) (asset sale incentive program approved for key employees with bonuses tied to asset sale price and consummation of the sale transaction); In re Leiner Health Prods., Inc., No. 08-10446 (Bankr. D. Del. May 30, 2008) (asset sale incentive program approved as permissible under section 503(c)). 227 See Beilinson Decl. 83-86.
109 K&E 19103759 Payment even though it has conferred no benefit to the estates). 228 A review of the objections of Midland, Lehman, and One East reveals that the objectors are generally amenable to the Debtors reimbursement of reasonable legal fees and expenses incurred by the Ad Hoc Committee, but each dispute the appropriateness of the amount of the Ad Hoc Committee Payment that exceeds such reasonable legal fees and expenses. 227. The Debtors recognize the unusual nature of the Ad Hoc Committee Payment and thought long and hard about it before eventually agreeing to it. Based on the unique circumstances of these Chapter 11 Cases, however, the Debtors respectfully submit that the Ad Hoc Committee Payment is an appropriate use of estate assets, a critical provision of the Plan, and permissible under a number of different provisions of the Bankruptcy Code. The following paragraphs describe the facts that warrant the Ad Hoc Committee Payment and the legal bases on which the Court may authorize it. 1. The Ad Hoc Committee Members Have Been Active Participants In These Chapter 11 Cases Since the Petition Date and Have Distinguished Themselves from Other Holders of Innkeepers USA Trust Preferred C Interests. 228. There can be no dispute that the Ad Hoc Committee members have distinguished themselves in these Chapter 11 Cases from other Holders of Innkeepers USA Trust Preferred C Interests. As the Court is well aware, the Ad Hoc Committee has been an activeand vocal participant in these Chapter 11 Cases. The Ad Hoc Committee formed shortly after the Petition Date and retained Dewey & LeBeouf as its legal counsel (Dewey) on July 28, 2010. Shortly
228 As discussed above in Argument Section II.B-C, the issues incorporated into the Plan have been the focus of almost a year of negotiations and deliberations by the Debtors, their secured lenders, the Ad Hoc Committee, and numerous other constituencies. Forms of the plan and disclosure statement have been on file for over two months. Yet the Debtors heard from One East for the first time on the day of the objection deadline. Before then, the Debtors had no contact with One East (no questions, no discussions, nothing). The Debtors were not given an opportunity to try and resolve One Easts concerns because the Debtors did not learn about them before One East filed its objection. One Easts objection should, therefore, be viewed for what it isan attempt to restart the Chapter 11 Cases, extract hold-up value from the Debtors, and advance its own pecuniary interests. The chapter 11 process should not reward One Easts blatant gamesmanship.
110 K&E 19103759 thereafter, the Ad Hoc Committee filed a motion requesting appointment of (a) an official committee of preferred shareholders and (b) an examiner to review the 2007 acquisition by Apollo and certain aspects of the Debtors restructuring efforts. Although the Bankruptcy Court denied both forms of requested relief on October 19, 2010, the Ad Hoc Committee had made it known that they would not stand idle while the Debtors pursued their marketing processeven if the Ad Hoc Committee would have to bear the costs of that involvement. 229. As the Debtors marketing process evolved, the Ad Hoc Committees role in these Chapter 11 Cases also evolved. On December 20, 2010, while the Debtors were in the final stages of negotiations with Five Mile and Lehman regarding the Original Stalking Horse Proposal, the Ad Hoc Committee members submitted their own bid for certain of the Debtors hotel properties. 229 In connection with the bid, the individual Ad Hoc Committee members agreed to backstopand set aside the funds fora $15 million rights offering. 230 The Debtors understand that the Ad Hoc Committee members kept that capital available from the time of the Ad Hoc Committees first bid through at least early May. Once they had become bidders, the Ad Hoc Committee members had clearly distinguished themselves and their role in these Chapter 11 Cases from other holders of Innkeepers USA Trust Preferred C Interests. 230. Over the course of the next several weeks, the Debtors continued to pursue the Original Stalking Horse Proposal, which contemplated the enterprise-level restructuring favored by the Debtors. 231 The Ad Hoc Committee continued to insist that the Debtors explore non-enterprise level restructuring options. 232 On January 12, 2011, after learning the details of
229 Derrough Decl. 36. 230 Id. 231 Id. 232 Id.
111 K&E 19103759 the Original Stalking Horse Proposal, the Ad Hoc Committee submitted a second bid. 233 This second bid exposed a significant flaw in the Original Stalking Horse Proposal because it demonstrated that the LNR Properties had value in excess of the amounts owing on the mortgage loans held by LNR. 234 To avoid losing the momentum generated in the extensive stalking horse marketing process, the Debtors proceeded to file the Stalking Horse Motion, but made it clear to Five Mile and Lehman that their Original Stalking Horse Proposal would likely need to be improved with respect to the LNR Properties or face significant risk of objections by the Ad Hoc Committee. 235
231. In February and March 2011, the Ad Hoc Committee objected to the Stalking Horse Motion and participated in the massive discovery process that preceded the hearing on the Stalking Horse Motion. As part of that process, Ad Hoc Committee members were asked to respond to extensive document requests. At the same time, the Ad Hoc Committee remained a significant player in the Debtors marketing process. 232. In March, the Ad Hoc Committees bids and continued opposition to the Original Stalking Horse Proposal ultimately helped the Debtors convince Five Mile and Lehman to modify the Original Stalking Horse Proposal to remove the Seven Sisters. 236 And, after the Seven Sisters were removed from the Original Stalking Horse Proposal, the Ad Hoc Committee remained steadfast in their efforts to participate in the Debtors marketing of the Seven Sisters so as to ensure maximum value for its own members and other holders of Innkeepers USA Trust Preferred C Interests.
233 Id. 234 Id. 235 Id. 236 See that certain letter from Michael J. Sage to Anup Sathy, dated February 15, 2011, and that certain letter from Michael J. Sage to Anup Sathy, dated February 22, 2011, attached hereto as Exhibit C.
112 K&E 19103759 233. In April, the Ad Hoc Committee continued to invest time and other resources into developing possible restructuring proposals, which included visits to the LNR Properties, the retention of hotel experts to help value the hotels, and discussions with third parties regarding potential bids for the LNR Properties. On April 25, 2011, while the Debtors were receiving final bids from parties as part of their broad marketing process, the Ad Hoc Committee submitted a third bid for the LNR Properties that included a new blanket mortgage in the amount of the current principal and accrued interest of the mortgage loans on the LNR Properties and maintained the $15 million rights offering that was backstopped by the Ad Hoc Committee members set forth in the two previous Ad Hoc Committee bids. This bid, as with the first two, was important in that it allowed the Debtors to continue to explore possibilities of an internal restructuring. This eliminated any perception in the marketplace that the Debtors were forced sellers and improved the Debtors negotiating dynamic with other bidders. 234. In May, Ad Hoc Committee members attended the Debtors auctions for the Fixed/Floating Properties and the LNR Properties. The auctions began on the morning of May 2, 2011 and did not conclude until the afternoon of May 3, 2011. During this time, the Ad Hoc Committee members engaged in hard fought negotiations with the Debtors and LNR that led to the Stipulation. The Stipulation resulted in LNR making its financing available to Chatham, which LNR only became willing to do because it knew that the Ad Hoc Committee would not subject LNR to expensive litigation regarding, among other things, the amount of LNRs claim. 237 The solidification of the financing for the Chatham bid permitted the Debtors to finalize and document the Chatham bid at $195 million. 238 The Ad Hoc Committees
237 The Stipulation included a waiver of LNRs ability to assert potentially millions of dollars in default interest and limited other fees otherwise payable to LNR, thereby saving the Debtors estates significant amounts. 238 Derrough Decl. 42.
113 K&E 19103759 participation during the auction process and its agreement to the Stipulation was a crucial catalyst that helped the Debtors unlock more than $7.7 million of incremental value compared to the highest formal offer submitted for the LNR Properties prior to the auctions. 239
235. Following the auctions, the Debtors negotiated with all of their constituents to resolve open issues related to these Chapter 11 Cases, including the Ad Hoc Committees concerns regarding the Chatham Hotel Sale Transaction and other terms of the Plan and Disclosure Statement. 240 During this period Ad Hoc Committee members attended meetings at K&Es offices and engaged in meaningful negotiations with the Debtors. 241 These efforts ultimately resulted in the Ad Hoc Committee Agreement, in which the Ad Hoc Committee agreed to support the Plan and the Chatham Hotel Sale Transaction. 242
236. This resolution eliminated a great deal of execution risk and helped pave the way to Confirmation as it allowed the Debtors to proceed with the Chatham Hotel Sale Transaction without the worry of the transaction being held up by expensive litigation and other objections brought by the Ad Hoc Committee. 243
237. In sum, the Ad Hoc Committee participated in these cases as both creditors and bidders. The individual members of the Ad Hoc Committee conducted all of their own analyses related to the Debtors business and the proposed restructurings. 244 In contrast, the other primary
239 Id. 43. 240 Id. 44. 241 Id. 242 Id. 243 Id. 44. 244 In other cases, official equity committees have paid significant amounts for similar services provided by financial advisors. In re Gen. Growth Props., Case No. 09-11977 (Bankr. S.D.N.Y., Feb. 7, 2011) (financial advisor to official equity committee received $150,000 monthly fee and seeks $2,050,000 restructuring fee and $5,950,000 success fee); In re Calpine Corp., Case No. 05-60200 (Bankr. S.D.N.Y. March 28, 2008) (consultants to the official equity committee awarded fees in the amount of $2,792,000, billed hourly, for their work during an eight month periodapproximately $350,000 of fees per month); In re Pilgrims Pride Corp.,
114 K&E 19103759 constituencies in these cases had the benefit of professional financial advisors that have been compensated with millions of dollars from the Debtors estates. 245 The Ad Hoc Committee members advocated for the benefit of holders of the Innkeepers USA Trust Preferred C Interests and assisted in generating the substantial value that they did for the Debtors estates, including the maximization of the value of the LNR Properties attributable to, among other things, the Ad Hoc Committees role in the modification of the Original Stalking Horse Proposal, the Stipulation, and the Ad Hoc Committee Agreement. Based on these facts, the Court can clearly distinguish the Ad Hoc Committee members from other holders of Innkeepers USA Trust Preferred C Interests, especially the late-comer One East. 2. Ample Authority Exists Under the Bankruptcy Code and Applicable Case Law for the Ad Hoc Committee Payment. 238. Midland, Lehman, and One East try to pigeonhole the Courts consideration of the Ad Hoc Committee Payment into the section 503(b)(3)(D) rubric. That is incorrect. Not only are the objectors incorrect to argue that the Ad Hoc Committee Payment does not satisfy the standard of section 503(b)(3)(D), the Court also has authority to approve the Ad Hoc Committee Payment under other Bankruptcy Code provisions, including section 1129(a)(4), section 503(b), section 363(b), section 1123(b)(3)(A), and section 105(a) of the Bankruptcy Code. 246
Case No. 08-45664 (Bankr. N.D. Tex. Oct. 27, 2009) (financial advisor to official equity committee received $150,000 monthly fee); In re Mirant Corp., Case No. 03-46590 (Bankr. N.D. Tex. Nov. 17, 2006) (financial advisor to official equity committee received $150,000 monthly advisory fee and was awarded a $3,200,000 value added fee). 245 Between the Petition Date and April 2011, the Debtors have received invoices of: approximately $2.1 million from Midlands financial advisors (FTI and Carl Marks), approximately $1.4 million from Lehmans financial advisor (Lazard), approximately $1.0 million from LNRs financial advisor (Miller Buckfire), and approximately $1.2 million from the Creditors Committees financial advisor (Jefferies). Further, contingent fees that may become payable at the conclusion of these Chapter 11 Cases (including Miller Buckfires $3 million fee) will drive these totals significantly higher. 246 The fact that the objectors view the Ad Hoc Committee Payment only through the lens of section 503(b)(3)(D) and section 503(b)(4) is surprising given the Bankruptcy Courts statements at the Disclosure Statement concerning there being multiple ways to potentially support the Ad Hoc Committee Payment. See 5/13/11 Hrg Tr. at 21:11-15 (My concern is that we not get to confirmation where you have global peace, and that we have
115 K&E 19103759 a. Section 1129(a)(4) Authorizes Payments Under Chapter 11 Plans. 239. The Court has the authority to approve the Ad Hoc Committee Payment pursuant to section 1129(a)(4). Section 1129(a)(4) provides: Any payment made or to be made by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. 247
240. As noted by Judge Gerber in Adelphia, payments beyond substantial contribution claims may be made pursuant to a plan so long as the payments are reasonable pursuant to section 1129(a)(4) of the Bankruptcy Code and are appropriate and not inconsistent with the applicable provisions of this title pursuant to 1123(b)(6). 248
241. As described above, the Ad Hoc Committee Payment has been fully disclosed and holders of impaired claims and interests against the Remaining Debtor Plan have had an opportunity to vote on the Plan. 249 And they have voted overwhelmingly in support of the Remaining Debtor Plan, thereby demonstrating consent to the Ad Hoc Committee Payment. And, as part of the Confirmation process, the Court has the opportunity to approve the payment as reasonable. Based on the time and resources committed by the Ad Hoc Committee to these
a provision in here that doesnt give you the room that you need to make the showings that you need, substantial contribution or what have you, to support this payment . . . I just had a concern that you build in enough flexibility to support this payment in any way that you can and should at confirmation . . . .) (emphasis added). 247 11. U.S.C. 1129(a)(4). 248 In re Adelphia Commcns Corp., 441 B.R. 6 (Bankr. S.D.N.Y. 2010). While the Debtors recognize that the Adelphia decision solely related to attorneys fees and expenses, the Debtors submit that the authority under section 1129(a)(4) can extend beyond attorneys fees and include a variety of payments under a plan (e.g., the reimbursable expenses and costs of the time of the Ad Hoc Committee members) so long as they are reasonable, appropriate, and not inconsistent with the applicable provisions of this title. 249 See Journal Register, 407 B.R. at 537 (approving post-confirmation payments to certain employees under an incentive plan disclosed in a plan of reorganization pursuant to section 1129(a)(4)).
116 K&E 19103759 Chapter 11 Cases (as discussed above), the Debtors respectfully submit that the Ad Hoc Committee Payment is reasonable and should be approved pursuant to section 1129(a)(4). 250
b. Allowance and Payment of the Ad Hoc Committee Payment Is Appropriate Under the Section 503(b) Standards Given the Substantial and Unique Benefits Provided to the Debtors by the Ad Hoc Committee. 242. 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, and commission for services rendered after the commencement of the case. Section 503(b) contains nine enumerated paragraphs specifying types of administrative expenses that are allowable. But, the nine examples of administrative expense claims listed in section 503(b) is a nonexclusive list. 251 The Debtors believe that the Ad Hoc Committee Payment is justified under either section 503(b)(3)(D) or generally as an administrative expense. 243. Despite Midlands, Lehmans, and One Easts statements, the Ad Hoc Committee Payment would constitute an allowable administrative expense under section 503(b)(3)(D) of the Bankruptcy Code. Section 503(b)(3)(D) provides for the allowance as an administrative expense of the actual, necessary expenses incurred by a creditor in making a substantial contribution in a chapter 11 case, i.e., a substantial contribution claim. 252 Courts in this and other districts have held that an applicant has substantially contributed to a chapter 11 case if it has provided an actual and demonstrable benefit to the debtors estate, its creditors, and to the extent relevant, the
250 To the extent necessary, the following paragraphs demonstrate that the Ad Hoc Committee Payment does comply with other applicable provisions of the Bankruptcy Code, as may be required by section 1129(a)(1). 251 See In re Pappas, 277 B.R. 171, 176 (Bankr. E.D.N.Y. 2002) (stating that categories are illustrative, not exhaustive); In re Ridgewood Sacramento, Inc., 20 B.R. 443 (Bankr. E.D. Cal. 1982). 252 11 U.S.C. 503(b)(3)(D); see also 11 U.S.C. 503(b)(4) (administrative expense claims for professional services rendered by an attorney or an accountant on behalf of parties entitled to section 503(b)(3)(D) claims).
117 K&E 19103759 debtors shareholders. 253 Factors that courts have considered in determining whether an applicant has made a substantial contribution in a chapter 11 case include: [1] whether the services were provided to benefit the estate itself or all of the parties in the bankruptcy case; [2] whether the services conferred a direct, significant and demonstrably positive benefit upon the estate; and [3] whether the services were duplicative of services performed by others. 254
244. The burden of demonstrating a substantial contribution claim falls on the claimants. 255 The Debtors have no reason to believe that the Ad Hoc Committee will not satisfy that burden at the Confirmation Hearing. No party has disputed that payment of the fees and expenses for the legal services rendered by the Ad Hoc Committees counsel, Dewey, will not satisfy the section 503(b) standard. 256 What remains in dispute, however, is whether the payment of the amount of the Ad Hoc Committee Payment that exceeds Deweys fees and expenses is appropriate under applicable law. 245. The individual members of the Ad Hoc Committee were required to expend significant time and resources on these Chapter 11 Cases, including numerous telephone conferences and in-person meetings with the Debtors, their advisors, and potential buyers. As a result of their efforts, the Debtors believe that a $1 million fee to be split among the six Ad Hoc
253 In re Dana Corp., 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008) (quoting In re U.S. Lines, Inc., 103 B.R. 427, 429 (Bankr. S.D.N.Y. 1989)). 254 See Dana Corp., 390 B.R. at 108. 255 In re Bayou Group, LLC, 431 B.R. 549, 560 (Bankr. S.D.N.Y. 2010) (The substantial contribution inquiry is factual, with the movant bearing the burden by a preponderance of the evidence.). 256 The Ad Hoc Committee provided the Debtors with the relevant invoices showing the fees and expenses of their counsel. These invoices indicate $2.1 million spent on legal services and $100,000 on fees and expenses incurred by Portfolio Hotels & Resorts for hotel site visits and analysis. The Debtors have reviewed these invoices and determined the fees and expenses to be reasonable under the circumstances. Accordingly, and as will be demonstrated by the Ad Hoc Committee itself, Deweys fees and expenses constitute actual, necessary costs and expenses of preserving the estate under section 503(b)(1)(A) and reasonable compensation for professional services rendered by an attorney . . . [of an equity security holder making a substantial contribution] under section 503)(b)(4).
118 K&E 19103759 Committee members is reasonable and appropriate under these circumstances. If the Ad Hoc Committee members were not reimbursed for their level of participation in these Chapter 11 Cases, the Ad Hoc Committee members would be forced to bear all of the costs associated with their efforts which helped create the value that will now accrue to all creditors of the Remaining Debtors and Holders of Innkeepers USA Trust Preferred C Interests (i.e., all of the parties that filed objections to the Ad Hoc Committee Payment). 257 Significantly, the Ad Hoc Committee Agreement also established a more certain and less expensive path toward Confirmation of the Remaining Debtor Plan (as discussed below). 246. Even if the Court were to find that the Ad Hoc Committee Payment does not fall entirely within section 503(b)(3)(D) of the Bankruptcy Code, the Court could nevertheless find that the Ad Hoc Committee Payment is an appropriate administrative expense claim. In general, a claim may be afforded administrative status: (a) if it arises out of a transaction between the creditor and the bankrupts trustee or debtor-in-possession; and (b) 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. 258 Both prongs are easily satisfied here. As noted by the Bankruptcy Court, the meaningful distributions that now appear destined for holders of Innkeepers USA Trust Preferred C Interests are the result of the unique efforts of the
257 It is interesting to note that two of the parties objecting to the Ad Hoc Committee Payment (Lehman and Midland) on the grounds that it reduces their potential recovery as holders of disputed guaranty claims against Grand Prix Holdings, were proponents of a bid (the Original Stalking Horse Proposal) that attributed zero value to these disputed guaranty claims. Thanks in part to the efforts of the Ad Hoc Committee members, the Debtors were able to unlock sufficient value at the LNR Properties that now provides for the possibility of a meaningful recovery on Midland and Lehmans disputed guaranty claims, if allowed. 258 Amalgamated Ins. Fund v. McFarlins Inc., 789 F.2d 98, 101 (2d Cir. 1986).
119 K&E 19103759 Ad Hoc Committee members and should be afforded substantial weight in considering whether the Ad Hoc Committee Payment is appropriate. 259
247. Accordingly, given the benefits conferred on the Debtors estates by the meaningful and unique participation of the Ad Hoc Committee members and the reasonableness of the amount of the Ad Hoc Committee Payment, the Bankruptcy Court, pursuant to section 503(b) of the Bankruptcy Code, should authorize the Debtors to pay the Ad Hoc Committee Payment as an administrative expense claim (including the approximately $1 million that exceeds the amount of Deweys fees and expenses). c. Allowance and Payment of the Ad Hoc Committee Payment Is Appropriate Under Section 363(b) as a Sound Exercise of the Debtors Business Judgment. 248. In any event, agreeing to make the Ad Hoc Committee Payment is a sound exercise of the Debtors business judgment and may be approved under section 363(b). Section 363(b)(1) provides, in relevant part, that [t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. 260 Section 363(b) does not specify a standard for determining when it is appropriate for a court to authorize the use, sale, or lease of property of the estate. However, the United States Court of Appeals for the Second Circuit has required that the authorization of such use, sale, or lease of property of the estate, not in the ordinary course of business, must be based upon the sound business judgment of the debtor. 261 In that regard, [w]here the debtor articulates a reasonable basis for its business
259 See 9/13/10 Hrg Tr. at 125:13-18 (To the extent that the ad hoc committee continues to play an active role, it is welcome to seek payment of its fees and expenses under Section 503(b) of the Code, and were there to be a meaningful recovery for the preferred shareholders, that would be given substantial weight in my consideration of a 503(b) motion.). 260 11 U.S.C. 363(b)(1). 261 See Official Comm. of Unsecured Creditors of LTV Aerospace and Defense Co. v. LTV Corp. (In re Chateaugay Corp.), 973 F.2d 141, 143 (2d Cir. 1992); Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983) (requiring some articulated business justification to approve the use, sale,
120 K&E 19103759 decisions (as distinct from a decision made arbitrarily or capriciously), courts will generally not entertain objections to the debtors conduct. 262 In particular, when applying the business judgment rule, courts give great deference to the substance of the directors decision and will not invalidate the decision, will not examine its reasonableness, and will not substitute its views for those of the board if the latters decision can be attributed to any rational business purpose. 263
249. While the Debtors acknowledge that the payment of the Ad Hoc Committee Payment is an atypical use of estate assets in a chapter 11 case, the business judgments made by the Debtors in connection with agreeing to seek the approval of the Ad Hoc Committee Payment have all been made based on a lengthy consideration of the relevant facts and options and for rational business purposes. 250. For instance, the Debtors considered that the agreement to make the Ad Hoc Committee Payment avoids the potential for the conclusion of these Chapter 11 Cases to be delayed by a contested Confirmation process and residual litigation thereafter that would have burdened the Debtors estates with substantial litigation costs. Avoiding disputes regarding the allowability of the Innkeepers USA Trust Preferred A Interests, objections to the Chatham APA and the marketing process that led to it, the resolution of Causes of Action against the Debtors trustees and/or management related to these Chapter 11 Cases, and other objections to the
or lease of property outside the ordinary course of business); see also Official Comm. of Subordinated Bondholders v. Integrted Res., inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992) (The business judgment rules presumption shields corporate decision makers and their decisions from judicial second-guessing when the following elements are present: (1) a business decision, (2) disinterestedness, (3) due care, (4) good faith, and (5) according to some courts and commentators, no abuse of discretion or waste of corporate assets.). 262 Comm. of Asbestos-Related Litigants and/or Creditors v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 616 (Bankr. S.D.N.Y. 1986). 263 In re Global Crossing Ltd., 295 B.R. 726, 744 (Bankr. S.D.N.Y. 2003) (citing Paramount Commcns Inc. v. QVC Network Inc., 637 A.2d 34, 45 n.17 (Del. 1994)).
121 K&E 19103759 Confirmation and Consummation of the Plan minimizes the potential for delay and diminished recoveries and substantially reduces costs related to a plan that has the support of over a billion dollars of claims. 251. In addition, the Debtors factored in the reduction of potential costs. Because of the large number of professionals who are compensated by the Debtors estates, 264 the average monthly cost to the Debtors estates for the compensation and reimbursement of professionals is approximately $4.4 million. Each successive month of these Chapter 11 Cases, thus, comes at a steep price. If substantial litigation were necessary to bring these Chapter 11 Cases to a conclusion, it is likely that the costs of the litigation would be high. 265 While the costs related to such potential litigation may not equal the levels associated with previous disputes regarding the plan support agreement and the Stalking Horse Motion, it is reasonable to estimate that the Stipulation and the Ad Hoc Committee Agreement (conditioned on the Ad Hoc Committee Payment) will save the Debtors estates several hundreds of thousands of dollars (if not millions) of litigation expenses that otherwise may have been necessary before these Chapter 11 Cases could be concluded. 252. Following lengthy consideration of the costs and benefits of the Ad Hoc Committee Payment, rather than face the prospect of an uncertain Confirmation and Consummation process and significant litigation costs, the Debtors instead elected to enter into the Ad Hoc Committee Agreement and seek the approval of the Ad Hoc Committee Payment.
264 The Debtors ultimately are responsible for the compensation and reimbursement of the following professionals: K&E, Moelis, AP Services, Omni, and Fried Frank (for the Debtors); Dechert and Lazard (for Lehman); Haynes and Boone, FTI, and Carl Marks (for Midland); Sheppard Mullin (for Marriott); Morrison Foerster and Jefferies (for the Creditors Committee); Bryan Cave, Duane Morris, and Miller Buckfire (for LNR and the LNR-Serviced Trusts); and Perkins Coie (for C-III). During these Chapter 11 Cases, these fees have averaged approximately $4.4 million per month. 265 As a reminder, the litigation costs related to the plan support agreement caused fees and expenses of professionals to spike to $7.4 million in August 2010 and the litigation costs related to the Stalking Horse Motion caused fees and expenses of professionals to climb to $5.1 million on average in February/March 2011.
122 K&E 19103759 As a result, the Debtors concession resulted in significant strides toward a successful, expeditious Consummation of the Plan that now has the overwhelming support of the Debtors major constituencies, including the Committee, LNR, C-III, CWCapital, Marriott, 98% of the unsecured creditors at the Remaining Debtors (other than Grand Prix Holdings), and 96% of holders of Innkeepers USA Trust Preferred C Interests who voted on the Plan. This vast creditor support, the $1.4 billion of transactions contemplated by the Plan, the substantial recoveries for the Debtors constituencies, and the close-at-hand conclusion to these Chapter 11 Cases should not be placed at risk by the objection of a small number of creditors that have a minor amount of potential recovery at stake. Authorizing the Debtors to pay the $1 million of the Ad Hoc Committee Payment that exceeds Deweys fees only impacts the potential recovery for Holders of Innkeepers USA Trust Preferred C Interests by approximately $0.10 per share (or $600,000). 266
253. Accordingly, given the overwhelming creditor support for the Plan, the disparity between the costs and risks of a potential delay, and the impact on the recoveries of affected constituencies, the decision to seek the payment of the Ad Hoc Committee Payment is appropriate under section 363(b) as a sound exercise of the Debtors business judgment. The Bankruptcy Court, therefore, should allowand authorize the Debtors to paythe Ad Hoc
266 For illustrative purposes only, given the approximate amount of the liquidation preferences and accrued dividends through March 2011 on the Innkeepers USA Trust Preferred C Interests and Innkeepers USA Trust Preferred A Interests, and the fact that the Innkeepers USA Trust Preferred C Interests and Innkeepers USA Trust Preferred A Interests are pari passu in priority, the payment of the amount of the Ad Hoc Committee Payment that exceeds Deweys fees and expenses ($1 million) will be borne 60% out of the recovery available for Holders of Innkeepers USA Trust Preferred C Interests (i.e., $600,000) and 40% out of the recovery available for Holders of Innkeepers USA Trust Preferred A Interests (i.e., $400,000). Of the combined amount of liquidation preferences and accrued dividends as of March 2011 (approximately $289 million), 60% relates to the Innkeepers USA Trust Preferred C Interests (liquidation preference of $145 million and approximately $28.l million of accrued dividends) and 40% relates to the Innkeepers USA Trust Preferred A Interests ($75 million and approximately $40.8 million of accrued dividends).
123 K&E 19103759 Committee Payment (including the approximately $1 million that exceeds the amount of Deweys fees and expenses). d. Payment of the Ad Hoc Committee Payment is Appropriate Under Section 1123(b)(3)(A) or Bankruptcy Rule 9019 to the Extent the Bankruptcy Court Determines That They Apply. 254. If the Bankruptcy Court were to consider the Ad Hoc Committee Payment as a component of a settlement, which the Debtors submit the Court need not, payment of the Ad Hoc Committee Payment is appropriate under the applicable standard of section 1123(b)(3)(A) or Bankruptcy Rule 9019. Section 1123(b)(3)(A) of the Bankruptcy Code provides a plan may provide for the settlement or adjustment of any claim or interests belonging to the debtor or the estate. Pursuant to Bankruptcy Rule 9019, bankruptcy courts can approve a compromise or settlement if it is in the best interest of the estate. 267 The settlement need not result in the best possible outcome for the debtor, but must not fall below the lowest point in the range of reasonableness. 268 To evaluate whether a settlement is fair and equitable, courts in the Second Circuit consider factors including: the balance between any litigations possibility of success and the settlements future benefits; the likelihood of complex and protracted litigation, with its attendant expense, inconvenience, and delay; the paramount interests of the creditors, including each affected classs relative benefits and the degree to which creditors either do not object to or affirmatively support the proposed settlement; whether other parties in interest support the settlement; the competency and experience of counsel supporting the settlement; and
267 See Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991). 268 Id.
124 K&E 19103759 the extent to which the settlement is the product of arms length bargaining. 269
255. A consideration of these factors reveals that the Ad Hoc Committee Payment, as part of the Ad Hoc Committee Agreement, is appropriate under Bankruptcy Rule 9019. After a lengthy consideration of the facts and circumstances, and following considerable negotiations with the Ad Hoc Committee and its counsel, the Debtors agreed to support the Ad Hoc Committee Payment. As discussed above, agreement to the Ad Hoc Committee Payment was necessary in gaining the support of the Ad Hoc Committee for the Chatham Hotel Sale Transaction and the Plan. Rather than face the prospect of an uncertain Confirmation and Consummation process and significant litigation costs, the Debtors elected to incorporate the Ad Hoc Committee Payment into the Plan and shorten the potential length of these Chapter 11 Cases. 270 Agreement to the Ad Hoc Committee Payment helped pave the way for the Confirmation and Consummation of the Plan that has the widespread support of the Debtors creditors. Of the creditors affected by the Ad Hoc Committee Payment, an overwhelming number supported the Ad Hoc Committee Payment by voting in favor of the Plan. For all these reasons, the Debtors entry into the Ad Hoc Committee Agreementincluding the agreement to support the Ad Hoc Committee Paymentis appropriate under Bankruptcy Rule 9019.
269 See Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 462 (2d Cir. 2007); see also Ionosphere Clubs, 156 B.R. at 428. 270 This characterization of the circumstances is supported by the Ad Hoc Committees letter in support of the Plan. See Ad Hoc Committee Plan Support Letter at p. 2 (From the Committees viewpoint, the alternative to the Plan is litigation. W hile the Committee believes it has meritorious and significant claims for breaches of statutory and fiduciary duties of many persons and entities, the litigation would be protracted and uncertain given the sophisticated entities involved. Therefore, the Committee has opted in favor of the Plan and urges you to support it.).
125 K&E 19103759 e. The Unique Facts and Circumstances of the Chapter 11 Cases Constitute Appropriate Grounds for the Court to Exercise its Equitable Powers Under Section 105(a) and Authorize Allowance and Payment of the Ad Hoc Committee Payment. 256. In addition to sections 1123(b)(3), 1129(a)(4), 503(b), and 363(b) of the Bankruptcy Code or Bankruptcy Rule 9019, the Debtors submit that the payment of the Ad Hoc Committee Payment is appropriate under the Bankruptcy Courts equitable power granted under section 105(a) of the Bankruptcy Code given the manner in which payment of the Ad Hoc Committee Payment will advance the Bankruptcy Codes goal of permitting debtors to successfully reorganize under chapter 11. 271 While the Debtors acknowledge that the Bankruptcy Courts equitable authority under section 105(a) should be exercised sparingly and with restraint, the Debtors submit that the unique facts and the way in which the Ad Hoc Committee Payment is a means to a very successful end to these Chapter 11 Cases support the rare exercise of this authority. 257. The Bankruptcy Court is familiar with the amount of efforts that all parties involved in these Chapter 11 Cases have exerted to get to this position. A limited number of objections to the Ad Hoc Committee Payment are the only primary hurdles left to overcome before these Chapter 11 Cases are concluded. If the Ad Hoc Committee Payment is not approved, and the Debtors are forced to withdraw their request to confirm the Remaining Debtor Plan, the Debtors estates will be significantly burdened. Since there is no section 363 sale motion on file, the closing of the Chatham Hotel Sale Transaction will be delayed by at least 21 days while the Debtors seek the Courts approval of the Chatham Hotel Sale Transaction pursuant to a section 363 sale motion. In addition, the LNR-Serviced Loans will continue to
271 See Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. Pship, 507 U.S. 380, 389 (1993) (the Bankruptcy Code entrusts bankruptcy courts with broad equitable powers to balance the interests of the affected parties, guided by the overriding goal of ensuring the success of the reorganization).
126 K&E 19103759 accrue interest at the rate of approximately $630,000 per month that the Debtors estates will bear and substantial professional fees will continue to be incurred. Distributions will be delayed and a Plan that has the overwhelming support of the Remaining Debtors constituencies will be subject to significant uncertainties. Accordingly, to the extent the Bankruptcy Court does not approve the Ad Hoc Committee Payment under one of the four aforementioned statutory authorities, this is the exact type of situation where the Bankruptcy Courts authority under section 105(a) should be exercised and the Ad Hoc Committee Payment should be authorized. 3. Additional Arguments Raised in the Objections Regarding the Ad Hoc Payment Are Without Merit. 258. There were three additional arguments raised in the Objections with respect to the Ad Hoc Committee Payment. Each of them that lack merit. First, Lehman suggests that payment of the fees and expenses of the Ad Hoc Committees counsel only would be appropriate to the extent it is subject to the final fee application process set forth in the Plan. 272 There is no basis for Lehmans request. Moreover, Lehmans objection is difficult to reconcile with the fact that the fees and expenses of Lehmans own advisors are paid for by the Debtors estates and yet are not subject to the final fee application process. 273 Second, Midland and Lehman both suggest that payment of the Ad Hoc Committee Payment by a Debtor other than Innkeepers USA Trust would constitute an impermissible gift or is otherwise inappropriate. The Debtors disagree. Payment of the Ad Hoc Committee Payment will be made by the Debtor(s) against whom the Ad Hoc Committee has adequately demonstrated its Administrative Claim. Given the substantial efforts of the Ad Hoc Committee to generate value for the LNR Properties, the Debtors
272 See Lehman Objection at 3. 273 In addition, the Debtors understand that the Ad Hoc Committee members have been paying the fees of Dewey out of their own pocket as they were incurred. There is no reason to think that such circumstances would have given rise to abuse, and, thus, there is no reason to incur the additional costs of the fee application process.
127 K&E 19103759 respectfully submit that an Administrative Claim paid by a Remaining Debtor (other than Grand Prix Holdings, Innkeepers USA Trust, and Innkeepers Financial Corporation) is appropriate. Third, One East asserts that the Plan violates section 1123(a)(4)s requirement of the same treatment for all claims within a class. Section 1123(a)(4), however, does not apply to treatment that claimants or interest holders receive on account of rights or contributions independent of their claim or interest. 274 The members of the Ad Hoc Committee are receiving the Ad Hoc Committee Payment on account of their role as bidder and unique participant (as discussed herein) that helped generate substantial value, not on account of their holdings of Innkeepers USA Trust Preferred C Interests. There is, therefore, no disparate treatment. F. The Debtors Purchase of D&O Tail Insurance Is Appropriate and Should Be Approved. 275
259. Section IV.U of the Plan provides that on the Confirmation Date of the Fixed/Floating Plan, the Debtors are authorized to extend their directors and officers liability insurance policies (the D&O Liability Insurance Policies) by entering into tail policies that would provide coverage for an extended six-year claims reporting period (the Tail Policies). The Debtors have obtained estimates from their existing insurers for the Tail Policies that provide for the identical type of claim and coverage limits as are provided under the existing D&O Liability Insurance Policies. The Tail Policies provide an aggregate amount of $30 million coverage for an aggregate one-time premium presently estimated to be approximately $620,276
274 Courts have held that the statute does not require identical treatment for all class members in all respects under a plan, and that the requirements of section 1123(a)(4) apply only to a plans treatment on account of particular claims or interests in a specific classnot the treatment that members of the class may separately receive under a plan on account of the class members other rights or contributions. See Adelphia, 368 B.R. at 24950 (emphasis added); In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660, 672 (Bankr. D.D.C. 1992) (The objectors fail to distinguish between a partners treatment under the plan on account of a claim or interest and treatment for other reasons. Only the former is governed by 1123(a)(4).) (emphasis added). 275 See Beilinson Decl. 87-88.
128 K&E 19103759 for the six-year term, subject to a potential reduction of such premium for any unearned premium on the existing D&O Liability Insurance Policies. 276
260. The Debtors have determined that it is an appropriate exercise of their business judgment to purchase the Tail Policies to protect the Debtors against indemnification claims that could be brought against the Debtors by their directors and officers. Further, after reviewing the estimates, the Debtors have concluded that the quote for the Tail Policies is reasonable and appropriate under the circumstances. Finally, no objections have been brought with respect to the Debtors purchase of the Tail Policies. Conclusion 261. The Debtors, as fiduciaries of their estates, submit that the Plan is the best alternative to maximize stakeholder value in a manner that fairly reflects creditor priorities.
276 Based on an estimated date of closing of July 31, 2011, the unearned premium on the existing D&O Liability Insurance Policies will be $105,447. Accordingly, the net premium will be approximately $514,829.
129 K&E 19103759
Respectfully submitted, /s/ Brian S. Lennon James H.M. Sprayregen, P.C. New York, New York Paul M. Basta Dated: June 23, 2011 Stephen E. Hessler KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900
K&E 19103759 EXHIBIT A Grand Prix Acquisition Trust Amended and Restated Declaration of Trust GRAND PRIX ACQUISITION TRUST AMENDED AND RESTATED DECLARATION OFTRUfi 21 p i' 50 Grand Prix Acquisition Tl11St (the "Trust"), a Maryland real estate investment trust ("REIT") mder Title 8 of the Cotparations and Associations Article of the Annotated Code of Maryland ("Title 8 11 ), desires to amend and restate its Declaration of Trust as currently in effect and as hereinafter amended and restated. The following provisions are all the provisions of the Declaration of Trust cmrently in effect and as hereinafter amended and restated: ARTICLE I FORMATION The Trust is a REIT within the meaning of Title 8. The Trust shall not be deemed to he a general partnership, limited partnership, limited liability company, joint venture, joint stock company or a cotparation (but nothing herein shall preclude the Trust from being treated for tax pUtpOses as an association under the Internal Revenue Code of 1986, as amended (the "Code")). ARTICLEil NAME The name of the Trust is: Grand Prix Acquisition Trust. Under circumstances in which the board of Trustees (as defined herein) of the Trust (the "Board of Trustees" or "Board") determines that the use of the name of the Trust is not practicable, the Trust may use any other designation or name for the Trost. ARTICLE Ill PURPOSE AND POWERS Section 1. Purposes. The pUtpOscs for which the Trust is formed are to invest in and to acquire, hold, manage, administer, control and dispose of property, including, without limitation or obligation. engaging in business as a REIT under the Code. Section 2. Powers. The Trust shall have all of the powers granted to REITs by Title 8 and all other powers set forth in the Declaration of Trust which are not inconsistent with law and are appropriate to promote and attain the purposes set forth in the Declaration of Trust. Yon Server7A. MSW ARTICLE IV RESIDENT AGENT The name of the resident agent of the Trust in the State of Maryland is The Corporation Trust Incorporated, whose post office address is 300 East Lombard Baltimore, Maryland 21202. The Trust may have such offices or places of business within or outside the State of Maryland as the Boord of Trustees of the Trust may from time to time determine. Section 1. Powers. ARTICLEV BOARD OF 'TRUSTEES (A) Subject to any express limitations contained in the Declaration of Trust or in the Bylaws of the (i) the business and affairs of the Trust shall be managed under the direction of the Boord and (ii) the Boord shall have full, exclusive and absolute power, control and authority over any and all property of the Trust. The Board may take any action as it, in its sole judgment and discretion, deems necessary or appropriate to conduct the busines!J and affairs of the Trust. The Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Board. Any construction of the Declaration of Trust or determination made in good faith by the Board concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the trustees on the Board (the "Trustees") included in the Declaration of Trust or in the Bylaws shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of the Declaration of Trust or the BylaW!! or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general Jaws of the State of Maryland or any other applicable Jaws. (B) The Board, without any action by the shareholders of the Trust (the ''Shareholdersj, shall have and may exercise, on behalf of the Trust, without limitation, the power to amend and repeal BylaW!! to the extent provided in tho Bylaws; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from holders of shares of beneficial interest of the Trust; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers. Section 2. Initial Trustees; Trustees. The number ofTrustees initially shall be one(!), which number may be increased or decreased pursuant to tho Bylaws of the Trust. The Trustees shall be elected at least every third year at an annual meeting of the Shareholders. The name and address of the Trustee who shall serve as the Initial Trustee and until the first meeting of the Shareholders and until his successor is duly elected and qualifies is: Name Aaron Sack 12.Kl90l04-Ncw Ycrl: SerYor7A. MSW Address c/o Apollo Investment Corporation 9 West 57th 41" Floor New York, NY 10019 2 This Trustee may increase the number of Trustees and fill any vacancy, whether resulting from an increase in the number of Trustees or otherwise, on the Board of Trustees prior to the first onnual meeting of Shareholders in the monner provided in the Bylaws. Subject to the rights of holders of one or more classes or series of Shares (as defined herein) to elect one or more Trustees, any vacancy created by removal may be filled by a majority of the remaining Trustees or by the affinnative vote of at least a majority of the votes of Shareholders entitled to be cast generally in the election of Trustees. Section 3. Resignation, Removal or Death. Any Trustee may resign by written notice to the Board, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed at any time, with or without cause, at a meeting of the Shareholders, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote generally in the election of Trustees. ARTICLE VI SHARES OF BENEFICIAL INTEREST Section I. Authorized Shares. The beneficial interest of the Trust shall be divided into shares of beneficial interest (the "Shares"). The Trust has authority to issue one hundred million (I 00,000,000) common shares of beneficial interest, $.01 par value per share ("Common Shares"), and twenty million (20,000,000) preferred shsres of beneficial interest, $.01 par value per share ("Preferred Shares"). Section 2. Common Shares. Subject to the provisions of Article VII, each Common Share sball entitle the holder thereof to one vote on each matter upon which holders of Common Shares are entitled to vote. The Board of Trustees may reclassify any unissued Common Shares from time to time in one or more classes or series of Shares. Section 3. Preferred Shares. The Board of Trustees may classify any unissued Preferred Shares and reclassify any previously classified but unissued Prefened Shares of any series from time to time, in one or more series of Shares .. Section 4. Classified or Reclassified Shares. Prior to issuance of classified or reclassified Shares of any class or series, the Board by resolution shall (a) designate that class or series to distingcish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) s e ~ subject to the provisions of Article Vl1 and subject to the express terms of any class or series of Shares outstanding at the time, the pn:ferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each series; and (d) canso the Trust to file articles supplementary with the State Department of Assessments and Taxation of Maryland ("SDAT 11 ). Any of the terms of any class or series of Shares set pursuant to clause (c) of this Section 4 may be made dependent upon facts or events ascertainable outside the Declaration of Trust (including determinations by the Board ofTrustees or other facts or events within the control of the Trust) and may vary among holders thereof, provided that the 3 Jl$090$.04-N!!W Ywk Suvcr7A.- MSW manner in which such facts, events or variations shall operate upon the tenns of such class or series of Shares is clearly and expressly set forth in articles supplementary filed with the SDAT. Section 5. Authorization by Board of Share Issuance. The Board may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash. property, past or future services, obligation for future payment or otherwise) as the Board may deem advisable (or without consideration in the case of a Share split or Share dividend), subject to such restrictions or limitations, if any, as may be set forth in the Declaration of Trust or the Bylaws of the Trust. Section 6. Dividends and Distributions. The holders of all Common Shares will participate equally in dividends payable to holders of Common Shares when and as authorized and declared by the Board of Trustees and in net assets available for distribution to holders of Common Shares upon liquidation or dissolution. The Board may from time to time authorize and declare to Shareholders such dividends or distributions, in cash or other assets of the Trust or in securities of the Trust or from any other source as the Board in its discretion shall determine. The Board of Trustees shaH endeavor to declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a REIT under the Code; however, Shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board. The exercise of the powers and rights of the Board ptu'Suant to this Section shall be subject to the provisions of any class or series of Shan::s at the time outstanding. Section 7. General Nature of Shares. All Shares shall be personal property entitling the Shareholders only to those rights provided in the Declaration of Trust. The Shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trost or of the property of the Trust. The death of a Shareholder shall not terminate the Trust. The Trust is entitled to treat as Shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust. Section 8. Fractional Shares. The Trust may, without the consent or approval of any Shareholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share. Section 9. Declaration of Trust and Bylaws. All Shareholders are subject to the provisions of the Declaration of Trust and the Bylaws of the Trust. ARTICLEVTI RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST Section 1. Restrictions on Transfer. (A) Definitions. The followieg terms shall have the following meanings: 4 ll$090S,()4.Ntw Vorl: Servw 7A. MSW (1) "Affiliate" of a person shall mean (i) any prnon that, directly or indirectly, controls or is controlled by or is under common control with such person, (ii) any other person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital shares, shares or equity interests of such person, or (iii) any officer, director, employee, partner or trustee of such person or of any person controlling, controlled by or Wlder common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisioru thereof. For the purposes of this definition, "control" (including the correlative meanings of the tenns "controlled by 11 and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests. (2) "Beneficial Ownership" shall mean owner>hip of Equity Sheres by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 544 of the Code, as modified by Section 856(hXl)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns, 11 and "Beneficially Owned" shall have correlative meanings. (3) "Beneficiary" shall mean, with respect to any Shere Trust, one or more organizations described in each of Section 170(bXl )(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that IIIC named by the Trust as the beneficiary or beneficiaries of such Share Trust, in accordance with the provisions of Section 2(A) hereof. (4) "Board of Trustees" shall mean the Board of Trustees of the Trust. (S) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (6) "Constructive Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(dX5) of the Code. The terms "Constructive Owner," "Corutructively owns,'' and "Constructively Owned" shall have correlative meanings. (7) "Equity Shares" shall mean Preferred Shares and Common Shares. The term "Equity Shares" shell inclode all Preferred Shares and Common Shares that are held as Shares-in-Trust in accordance with the provisions of Section 2 hereof. 5 12!10905.G4-New York SCO'ef7A. MSW (8) ''Fair Market Value shall mean, with respect to any class or series of outstanding shares of Equity Shares, the fair market value of such Equity Shares as determined by a nationally recognized investment banking or business appraisal finn retained by the Board of Trustees. (9) "Non-Transfer Event' shall mean an event (other than a pwported Transfer) that would cause any Person to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, including, but not limited to, the granting of any option or entering into any agreement for the sale, transfer or other disposition of Equity Shares or the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Equity Shares. (I 0) "Ownership Limit" shall mean, with respect to the Common Shares, 9.8% of the number of outstanding Common Shares and, with respect to any series of Preferred Shares, 9.8% of the nnmber of outstanding Preferred Shares of such series. (II) "Permitted Transferee" shall mean any Person designated as a Pennitted Transferee in accordance with the provisions of Section 2(E) hereof. (12) "Person" shall mean an individual, corporation, partnership, estate, trust, a portion of a trust permanently set aside for or to bO used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a u group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. ( 13) 'Prohibited Owner" shall mean, with respect to any purported Transfer or Event, any Person who, but for the provisions of Section l(C) hereof, would own record title to Equity Shares. (14) ''REIT" shall mean a real estate investment trust under Section 856 of the Code. (15) "Restriction Termination Date" shall mean the fll'S! day the Board of Trustees determines that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT. (16) "Shares-in-Trust" shall mean any Equity Shares designated Shares in-Trust pursuant to Section l(C) hereof. (17) 'Share Trust" shall mean any separate trust created pursuant to Section l(C) hereof and odministered in accordance with the terms of Section 2 hereof, for the exclusive benefit of any Beneficiary. 6 1250905.04-Ntw Yorlo: &rvor7A MSW ( 18) 'Share Trustee' shall mean any person or entity unaffiliated with both the Trust and any Prohibited Owner, such Share Trustee to be designated by the Trust to act as trustee of any Share Trust 1 or any successor trustee thereof. (19) "Transfer' (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operstion of law or otherwise. "Transfer" (as a verb) shall not have the correlative meaning. (B) Restriction on Transfers. (I) Except as provided in Section l(G) hereof, prior to the Restriction Terminstion Date, (i) no Person shall Beneficially Own or Constroctively Own outstanding Equity Shares in excess of the Ownership Limit and (ii) any Transfer that, if would resuJt in any Person Beneficially Owning or Constroctively Owning Equity Shares in excess of the Ownership Limit shall be void ab initio as to the Trsnsfcr of that number of Equity Shares which would be othenvise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit, and the intended transferee shall acquire no rights in such excess Equity Shares. (2) Except as provided in Section I( G) hereof, prior to the Restriction Terminstion Date, any Trsnsfer that, if effective, would result in the Equity Shares being beneficially owned by fewer than I 00 Persons (determined without reference to any rules of attribution) Shall be void ab initio as to the Transfer of that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such excess Equity Shares. (3) Prior to the Restriction Termination Date, any Transfer of Equity Shares that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of Equity Shares which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such excess Equity Shares. (4) Prior to the Restriction Termination Date, any Trsnsfer of Equity Shares that, if effective, would cause the Trust to Constroctively Own I 0% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B) oflbe Code to the extent the income derived by the Trust from such tenant would canse the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code, shall be void ab initio as to the Trsnsfer of that number of Equity Shares which would cause the Trust to Constructively Own 10% or more ofthe ownership interests in a tenant of the 7 12S090S,04-New Yor\ MSW Trusrs real property, within the.meaning of Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in such excess Equity Shares. (C) Transfer to Share Trust (l) If, notwithstanding the other provisions contained in this Section I, at any time and prior to the Res1riction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, then, (i) except as otherwise provided in Section l(G) hereof, the purported transferee shall acquire no right or interest (or, in .the case of a Non-Transfer Event, the person holding record title to the Equity Shares Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of Equity Shares which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, (li) such number of Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section 2 hereof, transferred automatieally and by operation of law to the Share Trust to be held in accordance with that Section 2 and (ill) the Prohibited Owner shall submit such number of Equity Shares to the Trust for registration into the name of the Share Trust. Such transfer to a Share Trust and the designation of shares as Shares-in-Trust shall be effective as ofthe close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. (2) If, notwithstanding the other provisions contained in this Section I, at any time prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the Equity Shares being beneficially owned by fewer than I 00 Persons (determined without reference to any rules of attribution), (ii) result in the Trust being "closely held within the meaning of Section 856(h) of the Code, or (iii) cause the Trust to constructively O'Ml 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d)(2}(B) of the Code, to the extent the income derived by the Trust from such tenant would cause the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the person holding record title of the Equity Shares with respect to which such N o n ~ Transfer Event occurred, shall cease to own any right or interest) in such munber of Equity Shares, the ownershlp of which by such purported transferee or record holder would (A) result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or (C) cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trusrs real property, within the meaning of Section 856(dX2)(B) of the Code, (y) 8 such number ofEquity Shares (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section 2 hereof, transferred automatically and by operation of law to the Share Trust to be held in accordance with that Section 2, and (z) the Prohibited Owner shall submit such number of Equity Shares !D the Trust for registration into the name of the Share Trust. Such transfer to a Share Trust and the designation of shares os Shares-In-Trust shall be effective os of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. (D) Remedies For Breach. If the Trust, or its designees, shall at any time determine in good faith that a Transfer bas taken place in violation of Section l(B) hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any Equity Shares in violation of Section l(B) hereof, the Trust shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer or acquisition. (E) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire Equity Shares in violation of Section l(B) hereof, or any Person wbo owned Equity Shares that were transferred to the Share Trust pursuant to the provisions of Section l(C) hereof, shall immediately give written notice to the Trust of such event and shall provide to the Trust such other information as the Trust may request in order to detennine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Trust's status as a REIT. (F) Owners Required To Provide Information. Prior to the Restriction Termination Date: (I) Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentages as required pursuant to regulations under the code, of the outstanding Equity Shares of the Trust shall, within 30 days after January I of each yeiU', provide to the Trust a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of Equity Shares Beneficially Owned or Constructively oWned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Trust such additional information as the Trost may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive ownership on the Trust's status as a REIT and to ensure compliance with the Ownership Limit. (2) Each Person who is a Beneficial Owner or Constructive Owner of Equity Shares and each Person (including the shareholder of record) who is holding Equity Shares for a Beneficial Owner or Constructive Owner shall provide to the Trust a written statement or affidavit stating such information as 9 Yo:k Sm"OI'7A MSW the Trust may request in order to determine the Trust's status as a REIT and to ensure compliance with the Ownership Limit. (G) Exceptions. (I) Subject to Section I (BX3) hereof, an underwriter which participates in a public offering or a private placement of Equity Shares (or securities convertible into or exchangeable for Equity Shares) may Beneficially Own or Constructively Own Equity Shares (or securities convertible into or exchangeable for equity Shares) in excess of the Ownership Limit, but only to the extent necessary to f110ilitate such public offering or private pl1100ment. In addition, the Board of Trustees, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel 1 in either case, in form and substance satisfactory to the Board of Trustees in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT, may exempt a Person from the Ownership Limit provided that (i) the Board of Trustees obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership or Constructive Ownership of Equity Shares will, violate the Ownership Limit and (ii) such Person agrees that any violation or attempted violation will result in a transfer to the Share Trust of Equity Shares pursuant to Section l(C) hereof. Notwithstanding the receipt of any ruling or opinion, the Board of Trustees may impose such conditions or restrictions as it deems appropriate in connection with granting such exemption. (2) Notwithstanding any other provisions contained in this Article VII, in no event shall Grand Prix Holdings LLC or any of its Affiliates be subject to the Ownership Limit or any other provisions set forth in this Article VII. Section 2. Shares-in-Trust. (A) Share Trust. Any Equity Shares transferred to a Share Trust and designated Shares-in-Trust pursuant to Section l(C) hereof shall be held for the exclusive benefit of the Beneficiary. The Trust shall name a beneficiary of each Share Trust within five days after discovery of the existence thereof. Any transfer to a Share Trust, and subsequent designation of Equity Shares as Shares-in-Trust, pursuantto Section !(C) hereof shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Share Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of the Trost and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding Equity Shares of the same class and series. The Prohibited Owner shall have no voting rights in the Equity Shares held by the Share Trust. The Prohibited Owner shall not benefit economically from ownership of any Equity Shares held in the Share Trust, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights aUributsble to the Equity Shares held in the Share Trust. When transferred to a Permitted Transferee in accordance with the provisions of Section 2(E) hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. 10 1250905.04-New York Sorvcr 7 A .. MSW (B) Dividend Rights. The Share Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Trustees on such Equity Shares and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to the Share Trust the amount of any dividends or distributions received by it that (i) are attributable to any Equity Shares designated Shares-in-Trust and (ii) the record date for which was on or after the date that such shares became Shares-in-Trust. The Trust shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on Equity Shares Beneficially Owned or Constructively Owned by the Penon who, but for the provisions of Section 1 (C) hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably'practicable fo1Jowing the Trust's receipt or withholding thereof, shall pay over to the Share Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. (C) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any disbibution of the assets of, the Trust, each holder of Trust shall be entitled to receive, ratably with e8ch other holder of Equity Shares of the same class or series, that portion of the assets of the Trust which is available for distribu1ion to the holders of such class and series of Equity Shares. The Share Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or provided, however, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Section 2(C) in excess of, in tho case of a purported Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in tho transfer of tho shares to the Share Trust, tho price per share, if any, such Prohibited Owner paid for the Equity Shares and, in the case of a Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if !be shares were received thruugh a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Share Trust shall be distributed to the Beneficiary. (D) Voting Rights. The Share Trustee shall be entitled to vote all Shares-in- Trust. Ar.y vote by a Prohibited Owner as a holder of Equity Shares prior to the discovery by the Trust that the Equity Shares arc Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Shares-in- Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Share Trust of Equity Shares under Section !(C) hereof, an irrevocable proxy to the Share Trustee to vote the Shares-in-Trust in the manner in which the Share Trustee, in its sole and absolute discretion, desires, 11 Scmr 7A MSW (E) Designation of Permitted TJII!lsferee. The Share Trustee shell have the exclusive and absolute right to designate a Permitted Transferee of any and all Shares-in- Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Share Trustee shall designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale), at a price as set forth in Section 2(G) hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Trust without such acquisition resulting in a transfer to a Share Trust and the redcsignation of such Equity Shares so acquired as Shares-in-Trust under Section l(C) hereof. Upon the designation by the Share Trustee of a Permitted Transferee in accordance with the provisions of this Section 2(E), the Share Trustee shall (i) cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be recorded on the bonks of the Trust that the Permitted Transferee is the holder of record of such number of Equity Shares, (iii) cause the Shares-in-Trust to be canceled and (iv) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust after making the payment to the Prohibited Owner pursuant to Section 2(F) hereof. (F) Compensation to Record Holder of Equity Shares that Become Shares-in- Trust. Any Prohibited Owner shall be entitled (following discovery of the Shares-in- Trust and subsequent designation of the Permitted Transferee in accordance with Section 2(E) hereof or following the acceptance of the offer to purchase such shares in accordance with Section 2(G) hereof) to receive from the Share Trustee following the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a pUipOrted Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Prohibited Owner paid for the Equity Shares, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in th,e transfer of shares to the Share Trust, the price per share equal to the Fair Market Value on the date of such Non-Transfer Event or Transfer and (ii) the price per share received by the Share Trustee from the sale or other disposition of such Shares-in-Trust in accordance with Section 2(E) hereof. Any amoWlts received by the Share Trustee in respect of such Sharesin-Trust and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section 2(F) shall be distributed to the Beneficiary in accordance with the provisions of Section 2(E) here: of. Each Beneficiary and Prohibited Owner waive any and all claims that they may have against the Share Trustee and the Share Trust arising out of the disposition of Shares-in- Trust, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section 2 by such Share Trustee or the Trust. (G) Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Fair Market Value at the time of devise, 12 1250905.04-New Yort SDMr7A MSW gift or Non-Transfer Event) and (ii) the Fair Marl<et Value on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period ofninety days after the later of (I) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust and (ii) the date the Trust determines in good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Trust does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section l(E) hereof. Section 3. Remedies Not Limited. Nothing contained in this Article VII shall limit the authority of the Trust to take such other action as it deems necessary or advisable to protect the Trust and the interests of its shareholders by preservation of the Trust's status as a REIT and to ensure compliance with the Ownership Limit Section 4. Ambiguity. In the case of an ambiguity in the application of any of the provisions of Article VII, including any definition contained in Section l(A) hereof, the Board of Trustees shall have the power to detennine the application ofthe provisions of this Article VII with respect to any situation based on the facts known to it. Section 5. Legend. Each certificate for Equity Shares shall bear the following legend: "The Common or Preferred Shares represented by this certificate arc subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may (i) Beneficially Own or Constructively Own Common Shares in excess of9.8% of the number of outstanding Common Shares; (ii) Beneficially Own or Constructively Own Preferred Shares of any series of Preferred Shares in excess of 9.8% of the number of outstanding Preferred Shares of such series, (iii) beneficially own Equity Shares that would result in the Equity Shares being beneficially owned by fewor than 100 Persons (determined without reference to any rules of attribution), (iv) Beneficially Own Equity Shares that would result in the Trust being "closely held" under Section 856(h) of the Code, or (v) Constructively Own Equity Shares that would cause the Trust to Constructively Own 10% or more of the ownership interests in a tenant of the Trust's real property, within the meaning of Section 856(d) (2) (B) of the Code to the extent the income derived by the Trust from such tenant would cause the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code. Any Person who attempts to Beneficially Own or Constructively Own shares of Equity Shares in excess of the above limitations must immediately notify the Trost in writing. If the restrictions above are violated, the Equity Shares represented hereby will, be transferred automatically and by operation oflaw to a Share Trust and shati be desigoated Shares-in-Trust. All capitalized terms in this legend have the meanings defined in the Trust's Amended and Restated Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer, wiU be sent without charge to each shareholder who so requests." Section 6. Severability. If any provision of this Article Vll or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of 13 such provision shall be affected only to the extent necessary to comply with the determination of such court. Section 7. Enforcement. The Trust is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. Section 8. Non-Woiver. No delay or foilure on the part of the Trust or the Board of Trustees in exercising any right hereunder shall operate as a waiver of any right of the Trust or the Board of Trustees, as the case may be, except to the extent specifically waived in writing. ARTICLEVTII SHAREHOLDERS Section I. Meetings. There shall be an annual meeting of the Shareholders, to be held on proper notice at such time (after the delivery of the annual report) aod convenient location as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Trustees, if required, and for the transaction of any other business within the powers of the Trust. Execpt as otherwise provided in this Declaration of Trust, special meetings of Shareholders may be coiled in the manner provided in the Bylaws. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. Section 2. Voting Rights. Subject to the provisions of aoy class or series of Shares then outstanding, the Shareholders shall be entitled to vote only on the following matters: (a) election of Trustees as provided in Article V, Section 2 aod the Bylaws arid the removal of Trustees as provided in Article V, Section 3; (b) amendment of the Decllll1ltion of Trust as provided in Article X; (c) termination of the Trust as provided in Article XIII, Section 2; (d) merger or consolidation of the Trust, or the sale or disposition of substantially all of the Trust Property, as provided in Article XI; and (e) such other matters with respect to which a vote of the Shareholders is required by applicable law or the Board has adopted a resolution declaring that a proposed action is advisable aod directing that the matter be submitted to the Shareholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in aoy way bind the Board. Section 3. Preemptive aod Appraisal Rights. Except as may be provided by the Board in setting the terms of classified or reclassified Shares pursuaot to Article VI, Section 4, no holder of Shares shall, as such holder, (a) have any preemptive or preferential right to purchase or subscribe for aoy edditional Shares of the Trust or any other security of the Trust which it may issue or sell or (b), except as expressly required by Title 8, have aoy right to require the Trust to pay him the fair value of his Shares in ao appraisal or similar proceeding. Section 4. Extraordinary ActiolllJ. Notwithstanding any provision of Maryland law requiring that aoy action be taken or authorized by the affirmative vote oftbe holders of a designated proportion greater than a majority of the Shares or votes entitled to be cast, such 14 llS090S.04-Ncw York Scrver7A. MSW action shall, unless the Declaration of Trust expressly states otherwise, be effective and valid if taken or authorized by the affmnative vote of the holders of a majority of the total number of Shares outstanding and entitled to vote thereon. Section 5. Board Approval. The submission of any action to the Shareholders for their considemtion shall first be approved by the Board. ARTICLE IX LIABILITY LIMITATION,INDEMNIFICA TION AND TRANSACTIONS WITH THE TRUST Section I. Limitation of Shareholder Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a Shareholder, nor shall any Shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any p ~ r s o n in connection with the property or the affairs of the Trust by reason of his being a Shareholder. Section 2. Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a REIT, no Trustee or officer of the Trust shall be liable to the Trust or to aoy shareholder for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of the Declaration of Trust or Bylaws of the Trust inconsistent with this section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland REIT for money damages in a suit by or on behalf of the Trust or by any shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property, or sen>ices, for the amount of the benefit or profit in money, property, or services actually received; or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or office(s action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Section 3. Indemnification. The Trust, to the maximum extent permitted by Maryland law in effect from time to time, shall indemnity and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former Shareholder, Tmstee or officer of the Trustor (b) any individual who, while a Trustee of the Trust and at the request of the Trust, serves or has served as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or fanner Shareholder, Trustee or officer of the Trust. The Trust shall have the power, with the approval IS . 1- of its Board, to provide such indemnification and advancement of expenses to 11 person who served as a predecessor of the Trust in any of the capacities described in (a) or (b) above, and to any employee or agent of the Trust or a predecessor of the Trost. Section 4. Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restrictions in the Declaration of Trost or adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind with any person, including any Trustee, officer, employee or agent of the Trust or any person affiliared with a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction. ARTICLE X AMENDMENTS Section 1. General. The Trust reserves the right from time to time to make any amendment to the Declaration of Trust, now or hereafter authorized by law, including any 8IIlendment altering the terms or contract rights, as expressly sat forth in the Declaration of Trust, of any Shares. All rights and powers conferred by this Declaration of Trost on Shareholders, Trustees and officers are granted subject to this reservation. An amendment to the Declaration of Trost (a) shall be signed and acknowledged by at least a majority of the Trustees, (b) shall be filed for record with SDAT as provided in Title 8 and (c) shall become effective as of the later of the time the SDAT accepts the amendment for record or the time established in the amendment. not to exceed 30 days after the amendment is accepted for record. All references to the Declaration of Trost shall include all amendments thereto. Section 2. By Trustees. The Trustees may amend the Declaration of Trust from time to time, in the manner provided by Title 8, without any action by the Shareholders, to qualifY as a REIT under the Code or under Title 8. Section 3. By Shareholders. Other than amendments pursuant to Section 2 of this Article X, any amendment to the Declaration ofTrust shall be valid only if approved by the affirmative vote of at least a majority of all the votes entitled to be cast on the matter. ARTICLEXl MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may (a) merge the Trust into another entity, (b) consolidate the Trust with one or more other entities into a new entity or (C) seliJ lease, exchange or otherwise transfer all, or substantially all of the Trost Property. Any such action must be approved by the Board of Trustees and, after notice to all Shareholders entitled to vote on the matter, by the affinnative vote of a majority of all the votes entitled to be cast on the matter. ARTICLE XI! 16 125090!.04-Ntw YW: ScMII" 7A - MSW INTENTIONALLY DELETED ARTICLEXIU DURATION AND TERMINATION OF TRUST Section I. Dmation. The Trust shall continue perpetually unless terminated pursuant to Section 2 of this Article XII or pursnant to any applicable provision of Title 8. Section 2. Termination. (a) Subject to the provision of any class or series of Shares at the time outstanding, the Trust may be terminated at any meeting of Shareholders, by the affinnative vote of a majority of all the votes entitled to be cast on the matter. Upon the termination of the Trust: (i) The Trust shall canyon no business except for the pUI]JOse of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the puwers of the Trustees under the Doclarstion of Trust shall continue, including the puwers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or 8IlY pan of the remaining property of the Trust to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or psy its liabilities and do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Trust may distribute the rem&ning property of the Trust among the Shareholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Trust shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (b) After termination of the Trust, the liquidation of its business and the distribution to the Shareholders as herein provided, a majority of the Trustees sha11 execute and file with the Trust's records a document certifying that the Trust has been duly terminated, and the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all Shareholders shu.ll cease. 17 I ---- -- ARTICLE XIV BUSINESS COMBINATION STATUTE The provisions of Title 3, Subtitle 6 of the Maryland General C01p0ration Law (the "MGCL") shall not apply to any business combination (as the term "business combination" is delined in the MGCL) involving the Trost. [Signature Page Follows] 18 CT CORPORATION SYSTEM 300 Eatl Lombard Strut BOitimore, MD 21202 Tel. 410 539 2B37 F u ~ t 410 332'1178 I hereby coosent to p,ct u resident agent In Marylwd rorthe endty named in the attached document. A CCH tEOALINFORM.f..'llON 5ERVlCE5 COMPANY State of Maryland Department of Assessments and Taxation Charter Division MILES & STOCKBRIDGE 10 LIGHT ST BALTIMORE Date: 06/27/2007 MD 21202-1435 THIS LETTER IS TO CONFIRM ACCEPTANCE OF THE FOLLOWING FILING: ENTITY NAME GRAND PRIX ACQUISITION TRUST DEPARTMENT ID D11860574 TYPE OF REQUEST ARTICLES OF AMENDMENT AND RESTATEMENT DATE FILED 06-27-2007 TIME FILED 01:50 PM RECORDING FEE $100.00 EXPEDITED FEE $70.00 COPY FEE $40.00 FII,ING NUMBER 1000361994950552 CUSTOMER ID 0001985447 WORK ORDER NUMBER 0001428485 Martin O'Malley GUl!tmtJT C. John Sollivao, Jr. Dirtctor Paul B. Anderson A.dmitristrawr PLEASE VERIFY THE INFORMATION CONTAINED IN THIS LETTER. NOTIFY THIS DEPARTMENT IN WRITING IF ANY INFORMATION IS INCORRECT. INCLUDE THE CUSTOMER ID AND THE WORK ORDER NUMBER ON ANY INQUIRIES. Charter Division Baltimore Metro Area (410) 767-1350 outside Metro Area (888) 246-5941 301 West Pmton Street-Room 801-Baltimare, Maryland 212012395 Teuphone (410)767-4950 /To/lfru in Maryland (888)246-5941 MRS (Maryland Relay Service) (800)7352258 TT!Voice Fax (410)333-7097 Website: www.dal.state.md.u.s 0004619871 CACCPT ENTITY TYPE: STOCK: CLOSE: EFFECTIVE DATE: PRINCIPAL OFFICE: RESIDENT AGENT: INVESTMENT TRUST y N 06-27-2007 300 EAST LOMBARD STREET BALTIMORE MD 21202 THE CORPORATION TRUST INCORPORATED 300 EAST LOMBARD STREET BALTIMORE MD 21202
K&E 19103759 EXHIBIT B Grand Prix Acquisition Trust Bylaws 1229525.03-New York Server 7A - MSW GRAND PRIX ACQUISITION TRUST BYLAWS ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office of Grand Prix Acquisition Trust, a Maryland real estate investment trust (the "Trust") shall be located at such place or places as the trustees (the "Trustees") on the board of trustees of the Trust (the "Board of Trustees") may designate. Section 2. ADDITIONAL OFFICES. The Trust may have additional offices at such places as the Trustees may from time to time determine or the business of the Trust may require. Section 3. FISCAL AND TAXABLE YEARS. The fiscal and taxable years of the Trust shall begin on January 1 and end on December 31. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE. All meetings of shareholders shall be held at the principal office of the Trust or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. An annual meeting of the shareholders for the election of Trustees and the transaction of any business within the powers of the Trust shall be held on the date and at the time fixed, from time to time, by the Board of Trustees. Failure to hold an annual meeting does not invalidate the Trusts existence or affect any otherwise valid acts of the Trust. Section 3. SPECIAL MEETINGS. The chairman of the Board of Trustees, if there be one, or the president or one-third of the Trustees may call special meetings of the shareholders. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. A special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any meeting of the shareholders held during the preceding twelve months. Section 4. NOTICE. Not less than ten nor more than 90 days before each meeting of shareholders, the secretary shall give to each shareholder entitled to vote at such meeting and to each shareholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such shareholder personally or by leaving it at his residence or usual 1229525.03-New York Server 7A - MSW 2 place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the shareholder at his post office address as it appears on the records of the Trust, with postage thereon prepaid. Meetings may be held without notice if all shareholders entitled to vote are present, or if notice is waived by those not present in accordance with Article XI. Section 5. SCOPE OF NOTICE. Any business of the Trust may be transacted at an annual meeting of shareholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of shareholders except as specifically designated in the notice. Section 6. ORGANIZATION. At every meeting of the shareholders, the chairman of the Board of Trustees, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the Board of Trustees, one of the following officers present shall conduct the meeting in the order stated: the vice chairman of the Board of Trustees, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by the shareholders entitled to cast a majority of the votes which all shareholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman shall act as secretary. Section 7. QUORUM. At any meeting of shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this Section 7 shall not affect any requirement under any statute or the Declaration of Trust of the Trust (as may be amended from time to time, the "Declaration of Trust") for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the shareholders, the shareholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 8. VOTING. A plurality of all the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to elect a Trustee. Each share may be voted for as many individuals as there are Trustees to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required herein or by statute or by the Declaration of Trust. Unless otherwise provided in the Declaration of Trust, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Section 9. PROXIES. A shareholder may vote the shares owned of record by him, either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Trust before or at the time of the 1229525.03-New York Server 7A - MSW 3 meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the governing board or similar governing body of such corporation or other entity or agreement of the partners of the partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such shares. Any trustee or other fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares of the Trust directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Trustees may adopt by resolution a procedure by which a shareholder may certify in writing to the Trust that any shares registered in the name of the shareholder are held for the account of a specified person other than the shareholder. The resolution shall set forth the class of shareholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure which the Trustees consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the shareholder of record of the specified shares in place of the shareholder who makes the certification. Notwithstanding any other provision contained herein or in the Declaration of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of beneficial interest of the Trust. This Section 10 may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition. Section 11. INSPECTORS. At any meeting of shareholders, the chairman of the meeting may, or upon the written request of the holders of shares entitled to cast not less than 50% of all the votes entitled to be cast at such meeting shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. 1229525.03-New York Server 7A - MSW 4 Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 12. NOMINATIONS AND SHAREHOLDER BUSINESS. (a) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Trustees and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the Trust's notice of meeting or (ii) by or at the direction of the Trustees. (b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Trust's notice of meeting. Nominations of persons for election to the Board of Trustees may be made at a special meeting of shareholders at which Trustees are to be elected (i) pursuant to the Trust's notice of meeting or (ii) by or at the direction of the Board of Trustees. (c) General. Only such persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible to serve as Trustees and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. Section 13. INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each shareholder entitled to vote on the matter and any other shareholder entitled to notice of a meeting of shareholders (but not to vote thereat) has waived in writing any right to dissent from such action, and such consent and waiver are filed with the minutes of proceedings of the shareholders. Section 14. VOTING BY BALLOT. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. ARTICLE III TRUSTEES Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The business and affairs of the Trust shall be managed under the direction of its Board of Trustees which may exercise all such powers of the Trust and do all such lawful acts and things as are not by statute or by the Declaration of Trust or by these Bylaws required to be exercised or done by shareholders. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Unless otherwise agreed between the Trust and the Trustee, each individual 1229525.03-New York Server 7A - MSW 5 Trustee, may engage in other business activities of the type conducted by the Trust and is not required to present to the Trust any investment opportunities presented to them even though the investment opportunities may be within the scope of the Trust's investment policies. In case of failure to elect Trustees at an annual meeting of the shareholders, the Trustees holding over shall continue to direct the management of the business and affairs of the Trust until their successors are elected and qualify. Section 2. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Trustees shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this Bylaw being necessary. The Trustees may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Trustees without other notice than such resolution. Section 3. SPECIAL MEETINGS. Special meetings of the Trustees may be called by or at the request of the chairman of the Board of Trustees, if there be one, or the president or by a majority of the Trustees then in office. The person or persons authorized to call special meetings of the Trustees may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Trustees called by them. Section 4. NOTICE. Notice of any special meeting shall be given by written notice delivered personally, telegraphed or mailed to each Trustee at his business or residence address. Personally delivered or telegraphed notices shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting. Telephone notice shall be given at least 24 hours prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Telephone notice shall be deemed given when the Trustee is personally given such notice in a telephone call to which he is a party. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Trustees need be stated in the notice, unless specifically required by statute or these Bylaws. Section 5. QUORUM. A majority of the entire Board of Trustees shall constitute a quorum for transaction of business at any meeting of the Trustees, provided that, if less than a majority of such Trustees are present at said meeting, a majority of the Trustees present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the Declaration of Trust or these Bylaws, the vote of a majority of a particular group of Trustees is required for action, a quorum must also include a majority of such group. The Trustees present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Trustees to leave less than a quorum. Section 6. VOTING. The action of the majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Trustees, unless the concurrence of a greater proportion is required for such action by applicable statute. 1229525.03-New York Server 7A - MSW 6 Section 7. TELEPHONE MEETINGS. Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 8. INFORMAL ACTION BY TRUSTEES. Any action required or permitted to be taken at any meeting of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each Trustee and such written consent is filed with the minutes of proceedings of the Trustees. Section 9. VACANCIES. If for any reason any or all the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder (even if fewer than two Trustees remain). Any vacancy (including a vacancy created by an increase in the number of Trustees) shall be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the Trustees then in office, though less than a quorum, or by a sole remaining Trustee. Any individual so elected as Trustee shall hold office for the unexpired term of the Trustee he is replacing and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Section 10. COMPENSATION. Trustees shall not receive any stated salary for their services as Trustees but, by resolution of the Trustees, fixed sums per year or per meeting. Expenses of attendance, if any, may be allowed to Trustees for attendance at each annual, regular or special meeting of the Trustees or of any committee thereof; but nothing herein contained shall be construed to preclude any Trustees from serving the Trust in any other capacity and receiving compensation therefor. Section 11. REMOVAL OF TRUSTEES. The shareholders may, at any time, remove any Trustee in the manner provided in the Declaration of Trust. Section 12. RESIGNATION OF TRUSTEES. Any Trustee of the Trust may resign from the Board of Trustees or any committee thereof at any time, by giving notice in writing to the chairman of the Board of Trustees, if there be one, the president or the secretary and, in the case of a committee, to the chairman of such committee. Such resignation shall take effect at the time therein specified or, if no time is specified, immediately; and unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. Section 13. LOSS OF DEPOSITS. No Trustee shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or shares have been deposited. Section 14. SURETY BONDS. Unless required by law, no Trustee shall be obligated to give any bond or surety or other security for the performance of any of his duties. Section 15. RELIANCE. Each Trustee, officer, employee and agent of the Trust shall, in the performance of his duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other 1229525.03-New York Server 7A - MSW 7 records of the Trust, upon an opinion of counselor upon reports made to the Trust by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Trustees or officers of the Trust, regardless of whether such counselor expert may also be a Trustee. Section 16. NUMBER AND QUALIFICATIONS. The number of Trustees of the Trust shall not be less than one (1) nor more than nine (9), the exact number of which shall be fixed by the Board of Trustees, provided that the number thereof shall never be less than required by Maryland law and further provided that the tenure of office of a Trustee shall not be affected by any decrease in the number of Trustees. Trustees need not be shareholders of the Trust. Section 17. INTERESTED TRUSTEE TRANSACTIONS. Section 2-419 of the Maryland General Corporation Law (the "MGCL") shall be available for and apply to any contract or other transaction between the Trust and any of its Trustees or between the Trust and any other trust, corporation, firm or other entity in which any of its Trustees is a trustee or director or has a material financial interest. ARTICLE IV COMMITTEES Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Trustees may appoint from among its members such committees as the Trustees consider appropriate, composed of one or more Trustees, to serve at the pleasure of the Board of Trustees. Section 2. POWERS. The Trustees may delegate to committees appointed under Section 1 of this Article any of the powers of the Trustees, except as prohibited by law. Section 3. MEETINGS. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another Trustee to act in the place of such absent member. Section 4. TELEPHONE MEETINGS. Members of a committee of the Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. ARTICLE V OFFICERS 1229525.03-New York Server 7A - MSW 8 Section 1. GENERAL PROVISIONS. The officers of the Trust may consist of a chairman of the Board of Trustees, a vice chairman of the Board of Trustees, a chief executive officer, a president, one or more vice presidents, a treasurer, one or more assistant treasurers, a secretary, and one or more assistant secretaries. In addition, the Trustees may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Trustees at the first meeting of the Trustees held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices may be held by the same person. In their discretion, the Trustees may leave unfilled any office except that of president and secretary. Election of an officer or agent shall not of itself create contract rights between the Trust and such officer or agent. Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust may be removed by the Trustees if in their judgment the best interests of the Trust would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Trust may resign at any time by giving written notice of his resignation to the Trustees, the chairman of the Board of Trustees, if there be one, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Trust. Section 3. VACANCIES. A vacancy in any office may be filled by the Trustees for the balance of the term. Section 4. CHIEF EXECUTIVE OFFICER. The Trustees may designate a chief executive officer from among the elected officers. The chief executive officer shall have responsibility for implementation of the policies of the Trust, as determined by the Trustees, and for the administration of the business affairs of the Trust. In the absence of both the chairman and vice chairman of the Board of Trustees, the chief executive officer shall preside over the meetings of the Trustees and of the shareholders at which he shall be present. Section 5. CHIEF OPERATING OFFICER. The Trustees may designate a chief operating officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 6. CHIEF FINANCIAL OFFICER. The Trustees may designate a chief financial officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 7. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD OF TRUSTEES. The chairman of the Board of Trustees, if there be one, shall preside over the meetings of the 1229525.03-New York Server 7A - MSW 9 Trustees and of the shareholders at which he shall be present and shall in general oversee all of the business and affairs of the Trust. In the absence of the chairman of the Board of Trustees, the vice chairman of the Board of Trustees shall preside at such meetings at which he shall be present. The chairman and the vice chairman of the Board of Trustees may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed. The chairman of the Board of Trustees and the vice chairman of the Board of Trustees shall perform such other duties as may be assigned to him or them by the Trustees. Section 8. PRESIDENT. In the absence of the chairman, the vice chairman of the Board of Trustees and the chief executive officer, the president shall preside over the meetings of the Trustees and of the shareholders at which he shall be present. In the absence of a designation of a chief executive officer by the Trustees, the president shall be the chief executive officer. The president may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Trustees from time to time. Section 9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Trustees. The Trustees may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. Section 10. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the shareholders, the Trustees and committees of the Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the Trust records and of the seal of the Trust; (d) keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder; (e) have general charge of the share transfer books of the Trust; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Trustees. Section 11. TREASURER. The treasurer shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trustees. The treasurer shall disburse the funds of the Trust as may be ordered by the Trustees, taking proper vouchers for such disbursements, and shall render to the president and Trustees, at 1229525.03-New York Server 7A - MSW 10 the regular meetings of the Trustees or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the Trust. If required by the Trustees, the treasurer shall give the Trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Trustees for the faithful performance of the duties of his office and for the restoration to the Trust, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Trust. Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Trustees. The assistant treasurers shall, if required by the Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Trustees. Section 13. SALARIES. The salaries of the officers shall be fixed from time to time by the Trustees and no officer shall be prevented from receiving such salary by reason of the fact that he is also a Trustee. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Trustees or by an authorized person shall be valid and binding upon the Trustees and upon the Trust when authorized or ratified by action of the Trustees. Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed by such officer or officers, agent or agents of the Trust in such manner as shall from time to time be determined by the Trustees. Section 3. DEPOSITS. All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the Trustees may designate. ARTICLE VII SHARES Section 1. CERTIFICATES. Each shareholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of beneficial 1229525.03-New York Server 7A - MSW 11 interests held by him in the Trust. Each certificate shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Trust. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Trust shall, from time to time, issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Trust, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Trust may set forth upon the face or back of the certificate a statement that the Trust will furnish to any shareholder, upon request and without charge, a full statement of such information. Section 2. TRANSFERS. Certificates shall be treated as negotiable, and title thereto and to the shares they represent shall be transferred by delivery thereof to the same extent as those of a Maryland stock corporation. No transfers of shares of the Trust shall be made if (i) void ab initio pursuant to any provision of the Declaration of Trust or (ii) the Board of Trustees, pursuant to any provision of the Declaration of Trust, shall have refused to permit the transfer of such shares. Permitted transfers of shares of the Trust shall be made on the share records of the Trust only upon the instruction of the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed share transfer power and the payment of all taxes thereon. Upon surrender to the Trust or the transfer agent of the Trust of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, as to any transfers not prohibited by any provision of the Declaration of Trust or by action of the Board of Trustees thereunder, it shall be the duty of the Trust to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Trustees may direct a new certificate to be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, the officer designated by the Trustees may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Trustees may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or determining shareholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of shareholders for any other purpose. Such date, in any case, shall not be prior to 1229525.03-New York Server 7A - MSW 12 the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of shareholders not less than ten days, before the date on which the meeting or particular action requiring such determination of shareholders of record is to be held or taken. In lieu of fixing a record date, the Trustees may provide that the share transfer books shall be closed for a stated period but not longer than 20 days. If the share transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the share transfer books are not closed for the determination of shareholders, (a) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Trustees, declaring the dividend or allotment of rights, is adopted. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 4, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. Section 5. STOCK LEDGER. The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each shareholder and the number of shares of each class held by such shareholder. Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may issue fractional shares or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Declaration of Trust or these Bylaws, the Trustees may issue units consisting of different securities of the Trust. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Trust, except that the Trustees may provide that for a specified period securities of the Trust issued in such unit may be transferred on the books of the Trust only in such unit. ARTICLE VIII DISTRIBUTIONS Section 1. AUTHORIZATION. Dividends and other distributions upon the shares of the Trust may be authorized and declared by the Trustees, subject to the provisions of law and the 1229525.03-New York Server 7A - MSW 13 Declaration of Trust. Dividends may be paid in cash, property or shares of the Trust, subject to the provisions of law and the Declaration of Trust. Section 2. CONTINGENCIES. Before payment of any dividends, there may be set aside out of any funds of the Trust available for dividends such sum or sums as the Trustees may from time to time, in their absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Trust or for such other purpose as the Trustees shall determine to be in the best interest of the Trust, and the Trustees may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX SEAL Section 1. SEAL. The Trustees may authorize the adoption of a seal by the Trust. The seal shall have inscribed thereon the name of the Trust and the year of its formation. The Trustees may authorize one or more duplicate seals and provide for the custody thereof. Section 2. AFFIXING SEAL. Whenever the Trust is required to place its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Trust. ARTICLE X INDEMNIFICATION AND ADVANCES FOR EXPENSES To the maximum extent permitted by Maryland law in effect from time to time, the Trust, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall indemnify (a) any Trustee, officer or shareholder or any former Trustee, officer or shareholder (including among the foregoing, for all purposes of this Article X and without limitation, any individual who, while a Trustee, officer or shareholder and at the express request of the Trust, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, shareholder, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of service in such capacity, against reasonable expenses incurred by him in connection with the proceeding, (b) any Trustee or officer or any former Trustee or officer against any claim or liability to which he may become subject by reason of such status unless it is established that (i) his act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) he actually received an improper personal benefit in money, property or services or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful and (c) each shareholder or former shareholder against any claim or liability to which he may become subject by reason of such status. In addition, the Trust shall pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a Trustee, officer 1229525.03-New York Server 7A - MSW 14 or shareholder or former Trustee, officer or shareholder made a party to a proceeding by reason such status, provided that, in the case of a Trustee or officer, the Trust shall have received (i) a written affirmation by the Trustee or officer of his good faith belief that he has met the applicable standard of conduct necessary for indemnification by the Trust as authorized by these Bylaws and (ii) a written undertaking by or on its behalf to repay the amount paid or reimbursed by the Trust if it shall ultimately be determined that the applicable standard of conduct was not met. The Trust may, with the approval of its Trustees, provide such indemnification or payment or reimbursement of expenses to any Trustee, officer or shareholder or any former Trustee, officer or shareholder who served a predecessor of the Trust and to any employee or agent of the Trust or a predecessor of the Trust. Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Declaration of Trust or these Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of this Article with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. Any indemnification or payment or reimbursement of the expenses permitted by these Bylaws shall be furnished in accordance with the procedures provided for indemnification or payment or reimbursement of expenses, as the case may be, under Section 2-418 of the MGCL for directors of Maryland corporations. The Trust may provide to Trustees, officers and shareholders such other and further indemnification or payment or reimbursement of expenses, as the case may be, to the fullest extent permitted by the MGCL, as in effect from time to time, for directors of Maryland corporations. ARTICLE XI WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Declaration of Trust or Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XII AMENDMENT OF BYLAWS The Trustees shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws. ARTICLE XIII 1229525.03-New York Server 7A - MSW 15 MISCELLANEOUS All references to the Declaration of Trust shall include any amendments thereto and any Articles Supplementary pertaining thereto.
132 K&E 19103759 EXHIBIT C Certain Letters from Michael J. Sage to Anup Sathy, P.C. Dechert LLP February 22, 2011 VIAE-MAIL Anup Sathy Kirkland & Ellis LLP 300 North LaSalle Chicago, Illinois 60654 1095 Avenue of the Americas New York, NY 10036-6797 +1 212 698 3500 Main +1 212 698 3599 Fax www.dechert.com MICHAEL J. SAGE michael.sage@dechert.com +1 212 698 3503 Direct +1 212 698 0439 Fax Re: In re Innkeepers USA Trust, et a/., Case No. 1 0-13 800 (SCC) Dear Anup: I am writing in response to your letter of last night. Contrary to your assertions, the fact is that you and Moelis have urged us on several occasions to consider a 65-hotel deal in light of perceived execution risks attendant to a larger deal. Similarly, you have expressed your awareness that a reduced structure would result in adjustments to the existing deal. It is our belief that, all things considered, including expediency and cost control, the best course of action is to pursue the 65-hotel deal. In order to address the items that have been discussed by us since my letter to you ofFebruary 15, 2011, we propose the following: The Debtors' marketing process would continue as is. The only adjustment would be that a Qualified Bid for the Midland/Lehman Debtors would be for those 65 hotels as a whole. The post-order marketing period would remain at 45 days. The distribution to unsecured creditors would be reduced pro rata to reflect the removal of seven hotels from the deal; the 65-pool would have no bearing on and would not pay for the remaining hotels. The provision in the Committment Agreement related to Bidder D will not be modified. The treatment of Trimont's claim would be unchanged from what originally contemplated in the Commitment Agreement. 16251757 US Austin Boston Charlotte Hartford New York Orange County Philadelphia Princeton San Francisco Silicon Valley Washington DC EUROPE Brussels Dublin London Luxembourg Moscow Munich Paris ASIA Beijing Hong Kong Dechert LLP Anup Sathy February 22,2011 Page2 The cash distribution to the preferred holders would not be addressed as it is now in an account that is maintained by a Debtor that is not a Midland/Lehman Debtor. We remain committed to consummating the Transaction outlined in the Commitment Agreement, if, in fact, that Transaction could be effected in an efficient manner and nothing herein shall be deemed a repudiation of such commitments. We stand ready to bring this case to a speedy resolution. We urge the Debtors to embrace this proposal. Please get back to us as soon as possible. Very truly yours, ~ Michael J. Sage cc: Michael Lascher Brandon Aebersold Brian E. Greer Adam L. Shiff Lenard M. Parkins 16251757 1095 Avenue of the Americas New York, NY 10036-6797 +1 212 698 3500 Main +1 212 698 3599 Fax www.dechert.com MICHAEL J. SAGE michael.sage@dechert.com +1 212 698 3503 Direct +1 212 698 0439 Fax US Austin Boston Charlotte Hartford New York Orange County Philadelphia Princeton San Francisco Silicon Valley Washington DC EUROPE Brussels Dublin London Luxembourg Moscow Munich Paris ASIA Beijing Hong Kong 16239911 NOT AN OFFER OR SOLICITATION FOR DISCUSSION PURPOSES ONLY SUBJECT TO RULE 408 February 15, 2011 VIA E-MAIL Anup Sathy Kirkland & Ellis LLP 300 North LaSalle Chicago, Illinois 60654 Re: In re Innkeepers USA Trust, et al., Case No. 10-13800 (SCC) (the Company) Dear Anup: In response to the Companys repeated requests that Lehman ALI Inc. (Lehman) and Five Mile Capital II Pooling REIT LLC (Five Mile) modify the Binding Commitment Agreement Regarding the Acquisition and Restructuring of Innkeepers USA Trust, dated as of January 14, 2011, and accompanying Term Sheet (the Commitment Agreement), I am pleased to inform you that Lehman is prepared to amend the Commitment Agreement as set forth below (the Amendments) to further the Companys reorganization efforts. The Amendments are supported by Five Mile and Midland Loan Services, a division of PNC Bank, National Association (in its capacity as Special Servicer for the Fixed Rate Loan, Midland), each of whom will confirm their support in a separate writing to you. Notwithstanding this accommodation, Lehman, Five Mile, and Midland remain ready, willing, and able to consummate the transaction set forth in the Commitment Agreement, and nothing herein shall be deemed a repudiation of such commitments. Capitalized terms used herein shall have the meanings ascribed to them in the Commitment Agreement. The Amendments provide a clear path for the Company to reorganize the debtors that own and/or lease the assets encumbered by mortgages in favor of Midland and Lehman (the Midland/Lehman Debtors). As such, the Amendments will significantly reduce the considerable costs that are being incurred by the Company and its estates in this process, as well as accelerate the timing for the reorganization of the Midland/Lehman Debtors. Innkeepers USA Trust February 15, 2011 Page 2 16239911 We propose the following Amendments to accommodate the Companys requests: The debtors that own and/or lease the assets commonly known as the Anaheim Hilton, Hilton Ontario, Residence Inn Mission Valley, Residence Inn Anaheim (Garden Grove), Hilton Doubletree Washington D.C., Residence Inn Tysons Corner, and Hilton Homewood Suites San Antonio (collectively, the Excluded Debtors) shall not be included in the transaction. The Auction shall be conducted only for the Midland/Lehman Debtors. The Company shall file a plan of reorganization for the Midland/Lehman Debtors (the Revised Plan). The Excluded Debtors shall not be included in the Revised Plan, shall have no impact on the timing of the Revised Plan, and shall proceed on their own account and timeline. The Company shall only consider enterprise bids for the Midland/Lehman Debtors that are premised on an all cash bid or on a cash/debt bid with a leverage ratio equal to or less than 70%. The Auction shall be held within 30 days following the date of the entry of the order granting the Bid Procedures Motion. The hearing on the Bid Procedures Motion shall be held on March 8, 2011. The Stalking Horse Fee and Bid Procedures shall remain the same as provided in the Commitment Agreement. SASCO 2008-C2, LLC, as 100% participant and owner of all economic and beneficial interests in the mezzanine loan relating to the assets in the floating rate pool, serviced by TriMont Real Estate Advisors, Inc. as special servicer, shall receive no recovery under the Revised Plan, other than any recovery received pursuant to the Overbid Allocation. The Company shall not seek approval of the reimbursement of up to $500,000 of expenses of Bidder D. Equity interests in the Midland/Lehman Debtors shall receive no recovery under the Revised Plan. All parties rights shall be preserved with respect to the approximately $7.4 million currently escrowed in an account held by Innkeepers USA Trust, and the resolution of the ownership of the $7.4 million shall not be a condition to the confirmation of the Revised Plan. Dechert Innkeepers USA Trust February 15,2011 Page3 LLP
Lehman, Five Mile, and Midland will seek to obtain the support of the Official Committee of Unsecured Creditors for this transaction, by reaching agreement on a pro rata distribution for the general unsecured creditors of the Midland/Lehman Debtors. All prepetition and postpetition costs and expenses (including attorneys' fees and section 503(b) claims) related to or incurred in respect of the Excluded Debtors or by the Preferred Shareholders shall be paid exclusively from the Excluded Debtors. The modification of such other provisions of the Commitment Agreement, as well as the side agreements with respect to the Commitment Agreement, as is necessary to conform such agreements to the foregoing. For the avoidance of doubt, unless expressly set forth herein, all other provisions of the Commitment Agreement and related side agreements shall remain in full force and effect. In addition, nothing herein shall constitute an admission that the existing transaction is incapable of confirmation under the Bankruptcy Code and applicable case law. Lehman believes that the Amendments to the Commitment Agreement will eliminate all material objections to the transaction and will enable the Company to emerge from Chapter 11 on an expeditious and consensual basis. In light of the present discovery schedule, we urge the Company to swiftly embrace this proposal to minimize the significant costs incurred by the Company and its estates. v ~ Michael J. Sage cc: Michael Lascher Brandon Aebersold Brian E. Greer Adam L. Shiff Lenard M. Parkins 16239911
In The United States Bankruptcy Court For The District of Delaware in Re:) Chapter 11 Pacific Energy Resources LTD., Et Al.,') Case No. 09-10785 (KJC) ) (Jointly Administered) Debtor.)