MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212)

468-8000 Facsimile: (212) 468-7900 Brett H. Miller Lorenzo Marinuzzi Jordan A. Wishnew Proposed Counsel for the Official Committee of Unsecured Creditors of Innkeepers USA Trust, et al. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re Innkeepers USA Trust, et al. Debtors. ) ) ) ) ) ) ) Chapter 11 10-13800 (SCC) Jointly Administered

RESERVATION OF RIGHTS OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN RESPONSE TO DEBTORS MOTION FOR AN ORDER (A) AUTHORIZING THE DEBTORS TO ASSUME THE PLAN SUPPORT AGREEMENT AND (B) GRANTING RELATED RELIEF

The Official Committee of Unsecured Creditors (the Committee) of Innkeepers USA Trust and certain of its direct and indirect subsidiaries in the above-captioned chapter 11 cases, as debtors and debtors in possession (collectively, the Debtors), by its proposed counsel, Morrison & Foerster LLP, hereby submits this reservation of rights in response to the Debtors Motion for an Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting Related Relief (the Motion) [Docket No. 15]. In support thereof, the Committee respectfully represents and alleges as follows:

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BACKGROUND A. 1. The Chapter 11 Cases On July 19, 2010 (the Petition Date), each of the Debtors filed with the Court a

voluntary petition for relief under Chapter 11 of the Bankruptcy Code, commencing the above captioned Chapter 11 cases. 2. Pursuant to an order of this Court dated July 20, 2010, the Debtors Chapter 11

cases are being jointly administered. 3. The Debtors continue to operate their businesses and manage their properties as

debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 4. On July 28, 2010, the United States Trustee for the Southern District of New York

appointed the five (5) member Committee pursuant to section 1102(a)(1) of the Bankruptcy Code. On that same date, the Committee selected Morrison & Foerster to serve as its counsel. 5. On July 30, 2010, the Committee met and selected Jefferies & Company, Inc. as

financial advisor and investment banker to the Committee. 6. A request has been made for the appointment of an examiner in these Chapter 11

cases (the Examiner Motion). A hearing on the Examiner Motion is scheduled for September 1, 2010. 7. Since the appointment of the Committee, its professionals have been working

continuously with the Debtors and their professionals to better understand the Debtors day-today operations and the events that precipitated this bankruptcy filing. These ongoing diligence efforts include reviewing the Debtors financial records, examining prepetition secured credit facilities, examining the Debtors prepetition financial transactions, including publicly filed documents concerning the 2007 acquisition by Apollo Investment Corp. (Apollo), and 2
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understanding the details of the plan support agreement between the Debtors and Lehman (defined below). Moreover, the Committees professionals have been in contact with advisors for other parties-in-interest to discuss these same issues. B. The Motion and Plan Support Agreement

The PSA 8. On the Petition Date, the Debtors filed the Motion, together with a proposed order

(the Proposed Order), seeking authority to enter into the plan support agreement (the PSA with Lehman ALI Inc. (Lehman, together with the Debtors, the Parties). Obtaining authority from this Court to assume to the PSA is necessary in order to secure Lehmans commitment to support the Debtors restructuring efforts, including Lehmans agreement to vote to accept a plan of reorganization based on the PSA. 9. Pursuant to the PSA, Lehman will agree to support the Plan and not support any

competing restructuring efforts so long as the Parties comply with the terms of the PSA, which includes implementing and consummating a reorganization that provides for converting the $238 million of Floating Rate Debt1 owned by Lehman into all of the equity in the reorganized Debtors (subject to dilution by a Management Equity Incentive Plan). 10. The PSA can be described as an amalgam of interrelated conditional agreements.

For example, Lehmans willingness to enter into the PSA is conditioned, in part, on its ability to sell a portion of the Reorganized Equity to a third party anticipated to be Apollo on or after the effective date of the Plan. Moreover, Lehmans support of the Plan is conditioned on the Debtors retention of certain franchise agreements, which will be facilitated by Marriott International Inc.s (Marriott) forbearance with respect to critical hotel properties, as set forth
1

Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion.

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in the Agreement for Adequate Assurance of Completion of Certain PIPs and Assumption of Agreements, dated June 25, 2010 between certain of the Debtors and Marriott (the Marriott Agreement). This requires the Debtors to obtain debtor-in-possession financing,2 in exchange for Marriott agreeing to forbear from exercising remedies pursuant to the Marriott Agreement, which will then allow the Debtors to retain franchise agreements, thus inducing Lehman to enter into the PSA. The PSA is clearly not a straight forward bilateral agreement. The Lock-Up 11. Sections 4(a)(ii) and (iii) of the PSA provide that no Party may directly or

indirectly engage in discussions regarding, or otherwise support, the formulation of any plan of reorganization or any restructuring other than pursuant to the Plan. 12. However, Section 25(a) of the PSA permits the Debtors to take, or refrain from

taking, any action (including terminating the PSA) if it is consistent with their fiduciary obligations under applicable law, with certain exceptions. This concept is defined in the PSA as the Debtors Fiduciary Out. 13. The PSA also delineates the Debtors rights with respect to Firm Alternative

Transactions. According to Section 25(c) of the PSA, the Debtors agree that: if the Company secures a binding and written commitment with respect to an alternative transaction that will provide Lehman with a higher and better recovery than the recovery proposed under the Plan, the Company shall provide Lehman with at least ten (10) Business Days to determine whether Lehman will consent to such Firm Alternative Transaction.; and

The Debtors are separately seeking authority from the Bankruptcy Court to enter into two debtor-in-possession financing facilities consisting of: (i) $50.75 million DIP Facility provided by Five Mile Capital Partners LLC, which will be used primarily to perform PIPs on certain hotels securing the Debtors obligations under the Fixed Rate Debt; and (ii) $17.5 million DIP facility provided by an affiliate of Lehman, which will be used to perform PIPs and certain other investments on hotels securing the Debtors obligations under the Floating Rate Mortgage Loan Agreement.

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[t]he Company agrees that in determining whether a Firm Alternative Transaction is higher and better, all factors must be considered includingLehmans opinion as to whether such Firm Alternative Transaction is higher and better. 14. One of the exceptions to the Debtors Fiduciary Out described above will occur if

Lehman does not consent to a proposed Firm Alternative Transaction. In that case, the Debtors right to exercise their Fiduciary Out is conditioned on obtaining an order from the Bankruptcy Court. Termination Events 15. Section 6 of the PSA sets forth the Termination Events of the PSA, and Section 8

describes the effects of the occurrence of the Termination Events. Section 6 does not contain any clear reference regarding whether the Fiduciary Out would trigger a Termination Event. Section 8(a) provides that in the event of a Termination Event, Lehman would be entitled to terminate the PSA and terminate the use of its cash collateral. Lehmans Fees 16. Sections 4(c) and 5(d) of the PSA provide that the Company shall pay all the

reasonable fees and expenses of Lehman in connection with the Transaction. It does not appear that there is a cap on such fees to be paid in the event they are incurred. RESERVATION OF RIGHTS 17. The Committee understands the importance of a successful reorganization and

appreciates that the PSA, as conditional as it may be, is intended to achieve that result. The Committee is rightfully concerned that the termination of the PSA could pose substantial risk to the survivability of the Debtors business. For this reason, the Committee does not oppose the Debtors Motion.

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18.

However, the Committee also seeks to ensure that the Debtors are obtaining

maximum value for their estates and their creditors. The Committees failure to object to the PSA does not limit its consideration of any plan of reorganization proposed by the Debtors, whether it be the Plan contemplated under the PSA or an alternative plan. Accordingly, the Committee hereby reserves all of its rights to oppose the Plan and Disclosure Statement at the appropriate time. 19. With respect to the terms of the PSA, in the event that the Debtors should exercise

the Fiduciary Out, it is unclear to the Committee whether the Fiduciary Out gives rise to a material breach or any other Termination Event under Section 6 of the PSA. It is not clear from the filed version of the PSA whether the remedies described in Section 8(a) of the PSA would be triggered by the Fiduciary Out. The Committee believes it is important to understand the significant consequences associated with the Fiduciary Out and therefore believes the PSA should be modified to clarify what remedies would be available to the Parties should the Debtors utilize the Fiduciary Out. Similarly, if the Fiduciary Out is a Termination Event that automatically terminates the PSA and the Debtors right to use Lehmans cash collateral, the Committee believes that the procedures set forth in the PSA should be modified to allow the Debtors the opportunity to seek appropriate relief from the Bankruptcy Court before the right to use cash collateral is cut off. 20. In addition, the Committee is concerned that should litigation ensue over the PSA

for any reason, sufficient protocols are not in place to protect the Debtors from being required to pay potentially substantial sums to reimburse Lehmans legal fees and expenses. Section 4(c) of the PSA mandates that Lehman is not required to file any documents or otherwise take action in support of the Plan unless the Company agrees to pay Lehmans legal fees, and section 5(d) 6
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notes that the Company shall pay all reasonable professional fees and expenses incurred by Lehman in connection with the Transaction. The PSA does not limit the Companys payment of Lehmans fees and does not indicate how any determination of what is reasonable is made. Without a cap on fees and expenses and/or the ability for the Committee or this Court to review the fee requests in advance of payment, the Committee believes that these costs have the potential to become a significant drain on estate assets to the detriment of the Debtors other creditors. 21. The Committee believes that the Parties should consider: (A) modifying the PSA

to clarify whether the Fiduciary Out gives rise to a Termination Event and whether there are specific remedies for the Parties in the event of a Fiduciary Out; (B) modifying Section 8 of the PSA to provide for a period of three (3) business days before the Debtors right to use cash collateral is terminated following a Fiduciary Out in order to allow the Debtors to seek relief from the Bankruptcy Court; and (C)(i) implementing a cap on or (ii) incorporating procedures for the Committee and/or this Court to review the fees and expenses that could be incurred by Lehman should the terms of the PSA become the subject of a dispute between Lehman, the Debtors and/or a third party. [concluded on the following page]

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CONCLUSION 22. The Committee appreciates that the PSA is an important and carefully negotiated

step towards the reorganization of the Debtors businesses. With the clarifications sought above, the Committee does not oppose the Motion. The Committee respectfully reserves all rights relating to the Plan approval process, including the right to object to the Plan or Disclosure Statement if it believes it necessary to do so. Dated: August 23, 2010 New York, New York Respectfully submitted, /s/ Lorenzo Marinuzzi MORRISON & FOERSTER LLP Brett H. Miller Lorenzo Marinuzzi Jordan A. Wishnew 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Proposed Counsel for the Official Committee of Unsecured Creditors of Innkeepers USA Trust, et al.

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