Lee S.

Attanasio SIDLEY AUSTIN LLP 787 Seventh Avenue New York, New York 10019 (212) 839-5300 (tel) (212) 839-5599 (fax) Counsel for Appaloosa Investment L.P. I UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------x In re : : Innkeepers USA Trust, et al., : : Debtors. : ------------------------------------------------------x

Hearing Date: September 1, 2010 at 8:30 a.m.

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

APPALOOSA INVESTMENT L.P. IS OBJECTION TO: (I) DEBTORS MOTION FOR THE ENTRY OF INTERIM AND FINAL ORDERS (A) 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. SEC. 361, 362, AND 363, (B) TO THE EXTENT APPROVED IN THE FINAL ORDER, GRANTING SENIOR SECURED, PRIMING LIENS ON CERTAIN POSTPETITION INTERCOMPANY CLAIMS, (C) TO THE EXTENT APPROVED IN THE FINAL ORDER, GRANTING ADMINISTRATIVE PRIORITY STATUS TO CERTAIN POSTPETITION INTERCOMPANY CLAIMS, AND (D) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001(B); AND (II) DEBTORS MOTION FOR AN ORDER (A) AUTHORIZING THE DEBTORS TO ASSUME THE PLAN SUPPORT AGREEMENT AND (B) GRANTING RELATED RELIEF Appaloosa Investment L.P. I (Appaloosa), a party in interest in these cases, objects to certain relief requested by the debtors and debtors in possession in the above-captioned cases (the Debtors) in the following motions: (i) Debtors Motion for the Entry of Interim and Final Orders (A) 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. Sec. 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent

Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 13] (the Cash Collateral Motion); and (ii) Debtors Motion for an Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting Related Relief [Docket No. 15] (the PSA Motion and together with the Cash Collateral Motion, the Motions). As grounds, Appaloosa respectfully states as follows: INTRODUCTION 1. These cases have just begun. At this juncture, the Debtors need two things to

ensure their continued stability and to preserve the value of these estates. First, the Debtors need access to cash claimed by their lenders as collateral in order to operate their businesses in the ordinary course. Second, in order to satisfy their property improvement programs or PIP obligations and maintain their flags, they require the financing contemplated by the two debtor-in-possession facilities that were prenegotiated before these cases filed (collectively, the DIPs).1 On these points, all parties in interest agree. 2. The Debtors prepetition and postpetition lenders have a big incentive to permit

the Debtors to use their cash claimed as collateral and to move forward with the DIPs. They, like everyone else, know that absent this consent and new financing, collateral values would plummet to their detriment. Midland Loan Services, Inc. and Five Mile Capital Partners LLC,2 the prepetition and postpetition lenders to the 45 Fixed Rate Debtors have indicated their willingness

Neither the DIP facilities nor the Debtors agreement with Marriot International, Inc. (the Marriott Agreement) is linked to any plan of reorganization. Appaloosa does not object to the Debtors entry into the Marriot Agreement, nor to approval of the DIPs. Midland Loan Services, Inc. (Midland) is the special servicer to the CMBS trusts which hold the Fixed Rate Mortgage (as defined below). An affiliate of Five Mile Capital Partners LLC is providing a DIP to the Debtors who are borrowers under the Fixed Rate Mortgage (the Fixed Rate Debtors).

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to consent, with appropriate protections, to the Debtors use of cash and to extending new credit to protect their prior investments with no extraneous requirements. Despite current protestations to the contrary, Lehman ALI, Inc. (Lehman), who has $220 million of its creditors money invested in Innkeepers, will do the same.3, 4 Common sense and their business judgment require it. See Motion of Lehman Commercial Paper Inc. Pursuant to Section 363 of the Bankruptcy Code for Authority to (I) Consent to its Non-Debtor Affiliate Lehman ALI Inc. (A) Entry Into Plan Support Agreement Related to the Restructuring of Innkeepers USA Trust; and (B) Consummation of the Transactions Set Forth in the Plan Term Sheet; and (II) Provide Funds to Solar Finance Inc., a Non-Debtor Affiliate, to Provide Debtor-In-Possession Financing [Lehman Docket No. 10465] at p. 38 (Marriotts entry into the Marriott Agreement, pursuant to which it has agreed to forbear from exercising its potential rights to terminate its franchise agreements is conditioned on, among other things, Innkeepers securing debtor-in-possession financing and completing the property improvement work plan. The proposed DIP Facilities, in turn, are conditioned on Marriotts willingness to support the proposed transaction and to forbear from de-flagging substantially all of Innkeepers properties in accordance with the Marriott Agreement.). 3. By this objection, Appaloosa seeks to separate what is critical to the preservation

of these estates from what is tactical, controversial and contentious. To be clear, as long as it is

[REDACTED] If Lehman will not proceed with the DIP, which is highly doubtful (especially given that the DIP Lehman is providing is essentially a roll-up that doesnt require Lehman to commit new capital), there is no evidence that another party would not provide the Floating Rate Debtors (defined below) with debtor-in-possession financing. As set forth in the Debtors motion to approve Lehmans DIP, as of the Petition Date, the Debtors had not yet shopped the DIPs. See Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 23] at 20.

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done in good faith and consistent with their fiduciary duties, the Debtors may propose any plan they want and may select any plan sponsor as a suitor. That plan will either survive the rigors of the chapter 11 process or it wont. If it doesnt, however, it shouldnt be so inexplicably linked to the Debtors lifeline that it risks the Debtors very foundation. For the interests of all, the Debtors should be free to proceed with their plan process without both arms tied behind their backs. 4. The Debtors have failed to demonstrate how their proposed plan support

agreement (the PSA) will promote a successful reorganization. By seeking to assume the PSA, as opposed to just filing a plan (even the same plan as is contemplated by the PSA) on the timetable currently proposed (i.e., on or before September 2, 2010; the day after this hearing), the Debtors are gambling the welfare of these estates on the plan being ultimately approved by this Court. This is a problem. 5. While Appaloosa does not believe the restructuring transaction proposed by the

PSA can ultimately be confirmed under the requirements of section 1129 of title 11 of the United States Code (the Bankruptcy Code), that is not an issue for today. Today, the Debtors cannot demonstrate an adequate business justification for agreeing that: Lehman can terminate the use of its cash collateral upon any PSA termination event without further court approval. See PSA 8(a). Lehman can force a sale under section 363 of the Bankruptcy Code of its collateral upon certain PSA termination events, or foreclose on its collateral without further need for court approval upon certain termination events. See PSA 8(b). Lehman can terminate the PSA if, among other things, a material adverse change in financial markets occurs (whether or not it affects the Debtors), or Lehman determines after completion of its tax due diligence that the transaction contemplated by the PSA cannot be structured in a manner acceptable to Lehman, when such events could lead to the termination of the use of Lehmans cash collateral. See PSA 6(p) and 6(q).
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The Debtors will not discuss any other restructuring options with any other parties, or potentially lose the use of Lehmans cash collateral. See PSA 5(c) and 6(r). The Debtors will only exercise a fiduciary out if they receive a binding written commitment of an alternate transaction that will provide Lehman with a higher and better recovery. See PSA 25(c).

6.

The Debtors have not and cannot demonstrate that the PSA will hasten their

emergence from chapter 11. To the contrary, it has spurred extensive discovery requests and a motion for an examiner. And unlike most plan support agreements, the PSA doesnt lock-up a critical mass of creditors. Here, the Debtors have signed up only one of the creditors needed to complete a comprehensive restructuring. And that support comes at a great price. It risks the loss of Lehmans cash collateral an unconscionable hammer held over the heads of all parties in interest in these cases.5 It prohibits the Debtors from negotiating with the numerous constituents who will be required to vote on their respective Debtors chapter 11 plan and requires the Debtors to shelve their fiduciary duties. For what? Absent the PSA, virtually nothing prevents the Debtors, Lehman and Apollo from filing their exact same plan on the exact same timetable. STANDING 7. As a preferred shareholder of Innkeepers USA Trust, Appaloosa is a party in

interest in these cases under section 1109 of the Bankruptcy Code. As such, Appaloosa has standing to bring this objection. In addition to owning a modest amount of preferred shares, Appaloosa has hundreds of millions of dollars invested in the Fixed Rate Mortgage (defined below) which is serviced by Midland as special servicer. While this interest is not direct and, in and of itself, arguably might not afford Appaloosa standing, disclosure of these investments is

[REDACTED]

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important to explain the significant weight of Appaloosas interest in seeing that the Debtors successfully restructure. Put simply, Appaloosa has a lot of skin in the game. 8. The purpose of the party in interest standing requirement under section 1109 of

the Bankruptcy Code, which provides that any party in interest . . . may raise and may appear and be heard on any issue . . ., is to ensure that those parties with a significant stake in the outcome of a bankruptcy case, or whose interests are being compromised, are heard on matters important to the outcome of a case. See In re Stone Barn Manhattan LLC, 405 B.R. 68, 74 (Bankr. S.D.N.Y. 2009) (The basic test under section 1109(b) is whether the prospective party in interest has a sufficient stake in the outcome of the proceeding so as to require representation. It is generally understood that a pecuniary interest directly affected by the bankruptcy proceeding provides standing under 1109(b).) (internal citations and quotations omitted). Thus, Appaloosa meets the requirement for technical standing, but also has a significant economic stake in the successful outcome of these cases. BACKGROUND 9. These cases were filed on July 19, 2010 (the Petition Date). The Debtors own

and operate a portfolio of 72 upscale and mid-priced extended-stay and select-service hotels located in 20 states across the United States. See Amended Declaration of Dennis Craven, Chief Financial Officer of Innkeepers USA Trust, In Support of First-Day Pleadings [Docket No. 33] (the Innkeepers Declaration) 6. 10. As of the Petition Date, the Debtors had incurred approximately $1.29 billion of

secured debt, consisting of (a) a securitized mortgage loan in the face amount of $825 million (the Fixed Rate Mortgage), collateralized by 45 of the Debtors hotel properties and divided into two CMBS pools, each of which is serviced by Midland as special servicer, (b) a floating rate senior mortgage loan in the face amount of $250 million (the Floating Rate Mortgage,
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the borrowers under such loan the Floating Rate Debtors) for which Lehman is the sole lender, collateralized by 20 hotel properties, plus a junior mezzanine loan in the face amount of $118 million secured by the equity interests in the entities that own those 20 hotels, and (c) seven additional secured mortgage loans (the Individual Mortgages) ranging in amounts from approximately $24 to $48 million, each secured by individual properties, with one additional mezzanine loan related to one of the Individual Mortgages. See Innkeepers Declaration 8, 2537. The Floating Rate Mortgage, Fixed Rate Mortgage, and Individual Mortgages are each secured by distinct hotel properties, and such mortgages are the liabilities of distinct debtors, such that the borrowers under the Floating Rate Mortgage, the Fixed Rate Mortgage and the Individual Mortgages do not overlap. See Innkeepers Declaration 24-37. In 2007, Apollo Investment Corporation (Apollo) acquired the membership interests of debtor Grand Prix Holdings LLC, the direct or indirect parent of all of the Debtors. See Innkeepers Declaration 8, 23. However, Debtor Innkeepers USA Trust has approximately 5.8 million shares of outstanding publicly traded preferred stock, and there are two other series of preferred stock issued by the Debtors that are not held by Apollo. See Innkeepers Declaration 38-40. 11. On the Petition Date, the Debtors moved for approval of two separate debtor-in-

possession financing facilities, consisting of (a) an approximately $50.75 million facility provided by an affiliate of Five Mile Capital Partners LLC, which will be secured by the 45 properties securing the Fixed Rate Mortgages and two of the properties securing the Individual Mortgages, and (b) an approximately $17.5 million term facility funded by an affiliate of Lehman, secured by the properties securing the Floating Rate Mortgages (the Lehman DIP). See Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition

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Financing from Five Mile Capital Partners on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), and 364(e) of the Bankruptcy Code [Docket No. 24] pp. 5-10. 12. The Debtors also filed a motion to obtain this Courts approval to enter into the

PSA with Lehman. Other than the Debtors, the only party to the PSA is Lehman. The PSA and its attached term sheet (the Plan Term Sheet)6 outline proposed terms for the Debtors restructuring (the Proposed Restructuring), which includes the distribution of 100% of the new equity of reorganized Innkeepers (the New Equity) to Lehman in full and final satisfaction of the Floating Rate Mortgage and a drastic reduction of the Fixed Rate Mortgage and the Individual Mortgages. See PSA Motion 8. Lehman has then entered into an agreement to sell half of the New Equity back to Apollo. See Motion of Lehman Commercial Paper Inc. Pursuant to Section 363 of the Bankruptcy Code for Authority to (I) Consent to its Non-Debtor Affiliate Lehman ALI Inc. (A) Entry Into Plan Support Agreement Related to the Restructuring of Innkeepers USA Trust; and (B) Consummation of the Transactions Set Forth in the Plan Term Sheet; and (II) Provide Funds to Solar Finance Inc., a Non-Debtor Affiliate, to Provide DebtorIn-Possession Financing [Lehman Docket No. 10465]. 13. The PSA prohibits the Debtors from negotiating, supporting, or engaging in any

discussions relating to any alternate chapter 11 plan or other transaction. See PSA 5(c) and Plan Term Sheet p. 5. If the Debtors were to engage in discussions regarding an alternate transaction, they could lose the use of Lehmans cash collateral. See PSA 6(r) and 8(a).

The Plan Term Sheet is attached as Exhibit A to the PSA, which in turn is attached to the PSA Motion as Exhibit B.

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ARGUMENT A. Entry Into the PSA Does Not Satisfy the Requirements of Section 365. 14. In order to justify their entry into the PSA, the Debtors must show that such entry

is supported by their sound business judgment, which judgment must be exercised fairly, and without prejudice to parties in interest. See In re Natl Oil Company, 80 B.R. 525, 526 (Bankr. D. Colo. 1987) (in explaining the requirement for court approval of a debtors decision to assume or reject a contract, the court noted that such requirement operates as a safeguard to protect against a unilateral decision by the debtor that could be prejudicial to the creditors); In re Grayhall Resources, Inc., 63 B.R. 382, 384 (Bankr. D. Colo. 1986) (debtor may assume contracts under section 365 where assumption represents a sound business judgment on the part of the Debtor and will not be prejudicial to the interest of the creditors); see also Trak Auto Corp. v. Ramco-Gershenson, Inc. (In re Trak Auto Corp.), 2002 WL 32129975, at *2 (Bankr. E.D. Va. Jan. 9, 2002) (when reviewing a section 365 motion, bankruptcy court must evaluate debtors business judgment by considering the impact of the debtors decision on a variety of parties as well as the impact on the debtors estate). As discussed below, due to a multitude of extraordinary provisions in the PSA, the Debtors have not adequately justified their entry into the PSA. i. 15. The Debtors Have Not Adequately Justified the Need for the PSA.

The PSA does not provide the Debtors with the votes needed to confirm an

enterprise-wide reorganization and, as demonstrated by the events of the last few weeks, will not spare these estates costly and contentious litigation. While there are a total of 92 Debtors, all of whom have signed the PSA, Lehman is the creditor of only 20 of the Debtors. There is no basis for substantive consolidation in this case. There are separate asset pools, and separate lenders for

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the Floating Rate Mortgage, the Fixed Rate Mortgage and the Individual Mortgages, with no cross-collateralization. See Innkeepers Declaration 24-37. Accordingly, the Debtors must secure at least one accepting class of impaired claims for each of the Debtors in order to confirm a plan of reorganization in each of the 92 cases. 11 U.S.C. 1129(a)(10). The PSA, which comes with a hefty price, does not help accomplish that. 16. The PSA is not necessary to stabilize the Debtors businesses. As long as the two

critical components, cash collateral and the DIPs, remain available as they should, irrespective of what happens to the PSA these cases will not be at risk of being a free fall bankruptcy. As a result, the Debtors have never been able to articulate a valid justification for entering into the PSA. ii. The Termination Events and the Restrictions on the Debtors Ability to Negotiate With Other Parties in Interest Are Imprudent and Not Supported by Business Judgment.

17.

Because the Debtors have coupled the PSA with their use of Lehmans cash

collateral, the real question is not whether the termination events in the PSA (the Termination Events) are reasonable for a PSA, but whether they are reasonable termination events for the use of cash collateral. 18. The many Termination Events are more fully set forth in Section 6 of the PSA,

but they include: Certain plan milestones (the Plan Milestones) including the confirmation of a plan consistent with the Plan Term Sheet by 240 days after the Petition Date; See PSA 6(a); Lehman having executed definitive documentation with respect to the sale of 50% of the equity in the reorganized Debtors by no later than September 2, 2010; See PSA 6(b); Lehman having consummated the sale of 50% of the equity by no later than 270 days after the Petition Date; See PSA 6(c);

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The entry of any order of this Court granting relief from the automatic stay (i) to permit any exercise of remedies by the lenders or special servicer under the Fixed Rate Mortgage, the Individual Mortgages or certain other debt, other than limited relief solely to permit the delivery of default notices under the terms of the applicable credit agreements; or (ii) to permit termination of any franchise agreement; See PSA 6(e); The filing by the Debtors of any motion or other request for relief seeking to (i) dismiss any of these cases, (ii) convert any of these cases to a case under chapter 7 of the Bankruptcy Code or (iii) appoint a trustee or an examiner with expanded powers pursuant to section 1104 of the Bankruptcy Code in any of these cases; See PSA 6(f); The filing by the Debtors of a request to extend any of the Plan Milestones or to alter any of the remedies available upon termination of the PSA, or the failure of the Debtors to oppose any motion from any other party to obtain such extension; See PSA 6(g); The entry of an order by this Court (i) dismissing any of these cases, (ii) converting any of these cases into a case under chapter 7 of the Bankruptcy Code, (iii) appointing a trustee or an examiner with expanded powers pursuant to section 1104 of the Bankruptcy Code in any of the cases, or (iv) making a finding of fraud, dishonesty or misconduct by any office or director of the Debtors, regarding or relating to the Debtors; See PSA 6(h); The withdrawal, amendment or modification by the Debtors of, or the filing by the Debtors of a pleading seeking to amend or modify, the plan proposed under the PSA, or the PSA, which withdrawal, amendment, modification or pleading is materially inconsistent with the terms set form in the Plan Term Sheet or the related plan or is materially adverse to Lehman; See PSA 6(i); The filing of any motion to approve a disclosure statement or plan by the Debtors that incorporates a pro forma capital structure or any terms inconsistent with the terms and conditions set for the in the Plan Term Sheet; See PSA 6(j); The granting by this Court of relief that is inconsistent with the terms set forth in the Plan Term Sheet, or the related plan, in any material respect; See PSA 6(k); The issuance by any governmental authority, including the Bankruptcy Court or any other regulatory authority or court of competent jurisdiction, of any ruling, determination or order making illegal or otherwise restricting, preventing or enjoining the consummation of a material portion of the Proposed Restructuring, including an order denying confirmation of the plan and such ruling, determination or order has not been vacated or reversed within five (5) business days; See PSA 6(l);

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The occurrence and continuation of a default under either of the DIPs; See PSA 6(m) & 6(n); The occurrence and continuation of a default in connection with the use of Lehmans cash collateral; See PSA 6(o); The occurrence of a material disruption or material adverse change in the financial, real estate, banking or capital markets (regardless of its affect on the Debtors); See PSA 6(p); Lehman having determined by September 2, 2010, in its sole discretion, after completion of its tax due diligence, that the transaction contemplated by the Plan Term Sheet cannot be structured in a manner acceptable to Lehman; See PSA 6(q); and The material breach by any party of any of their undertakings, representations, warranties or covenants set forth in the PSA. See PSA 6(r). Further, Section 5(c) of the PSA provides that neither Lehman nor the Debtors: shall, directly or indirectly, seek, solicit, negotiate, support or engage in any discussions relating to or enter into any agreements relating to, any restructuring, plan of reorganization, dissolution, winding up, liquidation, reorganization, merger, transaction, sale or disposition (or [sic] all or substantially all of their assets or equity) other than as set forth in the Plan Term Sheet and the Plan, nor shall either Party solicit or direct any person or entity, including, without limitation, any member of any of the Parties board of directors or, as to the Company, any holder of equity in the Company, to undertake any of the foregoing . . .

19.

See PSA 5(c) (emphasis added) (capitalized terms as defined in the PSA). This provision, when combined with the Termination Event in Section 6(r) of the PSA, will allow Lehman to terminate the use of its cash collateral if the Debtors even discuss an alternate restructuring with other parties in interest. 20. As discussed above, the Debtors need to recruit many additional votes in order to

confirm their proposed enterprise-wide transaction. But since they cannot propose any alternate restructuring without triggering a Termination Event, the only way they could confirm a plan for

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each of the Debtors would be to convince voting classes at each of the remaining 72 Debtors to sign on to this restructuring, all without the option of negotiating with such constituencies. 21. If the Termination Events merely triggered the loss of Lehmans support for the

Proposed Restructuring, Appaloosa would not object to the PSA, as Lehman may condition its support of a plan on any terms that it wishes. However, when such Termination Events and restrictions also trigger a termination of the use of cash collateral, and in certain events, a lifting of the automatic stay and allow for foreclosure by Lehman on its collateral, in each case, without further order of this Court, they cannot be sustained. 22. The termination of the use of Lehmans cash collateral is a serious threat, which,

if it occurred, would harm all parties in interest, not just the Floating Rate Debtors and their creditors. Such cash collateral termination will leave the other secured creditors in these cases to fund not only all business operations, but also these reorganization cases. This is particularly true since the Cash Collateral Order (defined below) does not contemplate compartmentalizing the cash of each Debtor or asset pool, but instead utilizes a consolidated cash management system with hindsight reconciliation of each Debtors cash. Transcript of Hearing Held on July 20, 2010 (7/20/10 Hrg Tr.) (excerpts cited herein attached as Exhibit C), at 72:1-22, 94:2395:15. 23. By definition, the multitude of Termination Events render Lehmans support of

the Proposed Restructuring highly contingent. In fact, the Honorable Judge James Peck, the Bankruptcy Court judge presiding over Lehmans chapter 11 cases, recently cited the highly contingent nature of Lehmans support for the Proposed Restructuring as one of the reasons that the Court was willing to authorize Lehman to enter into the PSA. See In re Lehman Brothers Holdings Inc., et al., Case No. 08-13555 (JMP), Transcript of Hearing Held on Aug. 18, 2010

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(excerpts attached as Exhibit D) at 113:8-12 ([This transaction] is, instead, approval of an agreement which is highly contingent and subject, ultimately, to the judgment of my colleague, Judge Chapman, as well as to the vagaries of the Innkeepers bankruptcy case itself, the future course of which is unpredictable.).7 Given these outs, the Debtors cannot forgo the ability to negotiate with every other creditor, and make any breach of its PSA an opportunity for Lehman to do significant harm to these estates. While Lehman can walk from the deal with impunity at many different turns, if the Debtors were to walk, they and their estates and creditors could be irreparably harmed. iii. 24. Fiduciaries Cannot Elect Not to Fulfill Their Duties.

The fiduciary out provisions of Section 25 of the PSA (the Fiduciary Out) are

impermissible. Section 25(c) of the PSA provides that: The Company agrees that the Fiduciary Out shall not apply, and may not be used, to annul, modify, amend, or otherwise alter any of the Plan Milestones or any of the remedies in respect thereof; provided, however, that if the Company secures a binding and firm 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 (a Firm Alternative Transaction), the Company shall provide Lehman with at least ten (10) Business Days to determine whether Lehman will consent to such Firm Alternative Transaction. If Lehman does not consent to such Firm Alternative Transaction, the Company may only exercise the Fiduciary Out after it has obtained an order from the Bankruptcy Court authorizing the Company to exercise the Fiduciary Out in accordance with the terms hereof. See PSA 25(c) (capitalized terms as defined in the PSA). 25. At least 72 of the 92 Debtors cannot agree to this provision and fulfill their

fiduciary duties. It is undisputed that each of the Debtors owes fiduciary duties to its own
7

Appaloosa holds a significant claim in the bankruptcy case of Lehman Commercial Paper Inc., and appeared in that case to oppose approval of Lehmans entry into the PSA and its sale of proposed recoveries from these cases to Apollo.

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creditors, including both their secured and unsecured creditors. In re Enron Corp., 2003 WL 1889040, at *8 (Bankr. S.D.N.Y. Apr. 17, 2003) ([T]he duty of the trustee or debtor-inpossession is to gather estate assets for pro rata distribution to all creditors. As such it has a fiduciary duty to all creditors and must seek to protect the interests of all creditors collectively.) (internal citations omitted) (emphasis added); In re Ngan Gung Rest., 254 B.R. 566, 570 (Bankr. S.D.N.Y. 2000) (A trustee also owes a fiduciary duty to each creditor of the estate. As such, he has a duty to treat all creditors fairly) (internal citations and quotes omitted) (emphasis added); In re Centennial Textiles, Inc., 227 B.R. 606, 612 (Bankr. S.D.N.Y. 1998) (A debtor in possession owes the same fiduciary duty as a trustee to the creditors and the estate . . . . As fiduciaries, the debtor in possession and its managers are obligated to treat all parties to the case fairly, maximize the value of the estate, and protect and conserve the debtors property.) (internal citations and quotes omitted); In re Whitney Place Partners, 147 B.R. 619, 620-21 (N.D.Ga.1992) (In a Chapter 11 case, the debtor in possession has a fiduciary duty to act not in its own best interest, but rather in the best interest of the entire estate, including secured and unsecured creditors.). 26. It is well established that an agreement that involves committing a breach of

fiduciary duty is illegal and unenforceable on the grounds of public policy. See RESTATEMENT (SECOND) OF CONTRACTS 193 (2010) (A promise by a fiduciary to violate his fiduciary duty or a promise that tends to induce such a violation is unenforceable on grounds of public policy.); Kessler v. Jefferson Storage Corp., 125 F.2d 108, 110 (6th Cir. 1941) ([W]here the object or tendency of a contract is to constitute a breach of duty on the part of one who stands in a confidential or fiduciary relation, it is illegal and void, as tending to be, or being, a fraud on third persons.). Bankruptcy courts honor this principle by refusing to approve or enforce

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agreements which would result in a violation of the debtor in possessions fiduciary duties to the estate. See In re U. S. Lines, Inc., 103 B.R. 427, 431 n.1 (Bankr. S.D.N.Y. 1989) (refusing to enforce an agreement by a debtor in possession to abstain from objecting to fee applications because [a] promise by a fiduciary tending to violate his fiduciary duty is unenforceable on grounds of public policy.); In re Tenney Vill. Co., Inc., 104 B.R. 562, 569 (Bankr. D.N.H. 1989) (refusing to approve DIP facility on the basis that the execution of the Financing Agreement violates the Debtors fiduciary obligations to the estate). 27. Even if this provision could somehow be justified for the 20 Debtors who count

Lehman as one of their creditors, 72 other Debtors cannot be allowed to forsake their duties to their separate creditors in order to placate a single secured creditor of an affiliate. Even if a duty could be bought (it cant), here, 72 Debtors are receiving no consideration for Lehmans support. Such Debtors are procuring their own financing, using their own cash and facing a highly contested valuation fight to determine if the Floating Rate Mortgage pool is claiming a disproportionate amount of their enterprise value. 28. The Debtors have not articulated a sufficient business justification for entry into

the PSA and accordingly, this Court should deny the PSA Motion. B. The Debtors Cannot Justify the Restrictions on Their Use of Cash Collateral on the Terms in the Cash Collateral Order. i. The Debtors Authority to Use Cash Collateral Should Not Be Conditioned on the Success of the Proposed Restructuring.

29.

The Debtors and Lehman seek to bind parties to a plan of reorganization through

a cash collateral order. As both the proposed cash collateral order (the Cash Collateral Order) and the PSA provide that the Debtors use of cash collateral will terminate if the Proposed Restructuring as set forth in the PSA does not proceed as planned, this gives Lehman

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the ability to do an end run around the chapter 11 process if the Proposed Restructuring is not accomplished. See Cash Collateral Order, at 10(a)(xvii) (providing that a Termination Event shall occur following applicable notice if the Floating Rate Debtors breach any of their material obligations arising in connection with the proposed restructuring of the Floating Rate Obligations); PSA, at 8(a) (Lehman may terminate use of its cash collateral upon occurrence of any termination event, including the Debtors failure to meet certain plan milestones). 30. As the Debtors have acknowledged, Use of the Cash Collateral is of the

utmost importance to the preservation and maintenance of the value of the Debtors and essential to the continued operations of the Debtors and the restructuring. Cash Collateral Motion, at 26. Termination of the use of cash collateral would bring the Debtors business to an immediate halt and have disastrous consequences for the Debtors reputation, their business, their ability to attract future customers, and their estates and creditors.8 Id. By conditioning such a critical function to the success or failure of the Proposed Restructuring, the Debtors have essentially fashioned an agreement with Lehman that ties the Debtors fortunes, and consequently the fortunes of all of their stakeholders, on a single plan formulated by and for the benefit of Lehman and Apollo.9 31. As articulated by the Second Circuit, any agreement authorizing the use of cash

collateral under 363(c)(2) must be approved by the bankruptcy court, which must satisfy itself that the agreement complies with the Code. In re Blackwood Assocs., L.P., 153 F.3d 61, 67 (2d Cir. 1998). The primary purpose of this review is to protect stakeholders who were not
8

Notably, the debtor-in-possession financing being provided in these cases may only be used for PIP work and other renovations, and cannot be used for ordinary course business expenses, making cash collateral the only source of funds to operate the Debtors on a day-to-day basis. See Lehman DIP Term Sheet, at 4; Five Mile DIP Term Sheet, at 5. [REDACTED]

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parties to the agreement. Id. at 67-68 ([T]here is seldom any need to protect the parties to the agreement, who may be deemed to have waived their rights to the extent the agreement does not comply with the Code.) (quoting 9 Lawrence P. King, et al., COLLIER ON BANKRUPTCY (15th ed. rev. 1998), 4001.07[4]). 32. Sections 363(c)(2) and (e) of the Bankruptcy Code authorize a debtor in

possession to use cash collateral if the secured party consents or the court authorizes such use after concluding that the creditors interests in the cash collateral are adequately protected. See Blackwood Assocs., 153 F.3d at 67; In re Vienna Park Props., 976 F.2d 106, 114 (2d Cir. 1992). 33. The Cash Collateral Order and PSA should be amended to eliminate Lehmans

ability to terminate the use of its cash collateral based on a breach of the Debtors obligations under the PSA or in connection with the Proposed Restructuring. Otherwise, waiver of the Debtors right under the proposed Cash Collateral Order would be tantamount to presenting the Debtors stakeholders with an ultimatum: support the Proposed Restructuring or watch the Debtors value quickly and certainly erode along with any hope for restructuring. 34. Courts will refuse to approve terms in an agreement with secured creditors or

other constituents that would unduly restrict the Debtors, bias the course of the chapter 11 process or prejudice other stakeholders. See, e.g., In re Tenney Vill., 104 B.R. 562, 568 (Bankr. D.N.H. 1989) (denying debtor authority to enter into financing agreement that provided stay relief to permit secured creditors foreclosure without further court order upon termination events including the confirmation of a plan over the secured creditors objection or any other party in interest taking any action against the lender on the basis that the overall effect of the agreement would disarm the debtor of all weapons usable against it for the bankruptcy estates benefit, place the Debtor in bondage working for the Bank, seize control of the reins of reorganization,

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and steal a march on other creditors in numerous ways. The Financing Agreement would pervert the reorganizational process from one designed to accommodate all classes of creditors and equity interests to one specially crafted for the benefit of the Bank and the Debtors principals who guaranteed its debt.); In re Ames Dept. Stores, Inc., 115 B.R. 34, 37, 40-41 (Bankr. S.D.N.Y. 1990) (acknowledging, in the context of approving DIP financing only after overreaching terms benefiting secured creditor were deleted, that courts have focused their attention on proposed terms that would tilt the conduct of the bankruptcy case; prejudice, at an early stage, the powers and rights that the Bankruptcy Code confers for the benefit of all creditors; or leverage the chapter 11 process by preventing motions by parties-in-interest from being decided on their merits.). 35. The Debtors are seeking to use the other Adequate Protection Parties (as defined

in the Cash Collateral Order) cash collateral without their consent based on the provision of adequate protection in the form of expense reimbursements, adequate protection liens, section 507(b) claims, the Cash Use Covenant and other concessions. See Cash Collateral Motion at 23, 29-30. Since this very same adequate protection package is being provided to Lehman, the Debtors have already argued that Lehmans interests in its cash collateral will be adequately protected regardless of whether it consents or not. Indeed, the Cash Collateral Motion and Interim Cash Collateral Order both assert that the adequate protection package serves as adequate protection for Lehman as well as the other Adequate Protection Parties. See Cash Collateral Motion, at 32 (In light of the foregoing, the Debtors submit that the Proposed Adequate Protection obligations are necessary and appropriate under the circumstances of the Chapter 11 Cases to ensure the Debtors are able to continue to using Cash Collateral [which includes Lehmans cash collateral].); Interim Cash Collateral Order, at 6 (As adequate

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protection for, and to the extent of, any diminution in the value of any Adequate Protection Partys [which includes Lehman] interest in the Prepetition Collateral [which includes Lehmans cash collateral].). Presumably Lehman would agree since its approval of the first day motions, including the adequate protection package in the Cash Collateral Motion, is required under the PSA. PSA, at 5(b). 36. Since Lehman will be adequately protected under the Cash Collateral Order in

any event, no link to a plan should be approved. ii. 37. Cash Collateral Should Not Be Used to Finance Activities That Do Not Benefit the Estates.

Appaloosa further objects to the Cash Collateral Order to the extent that it

proposes to reimburse expenses of the Representatives (as defined therein) that do not benefit the estate. A debtors use of cash collateral must be exercised on the basis of its sound business judgment toward the goal of maximizing the Debtors estates for the benefit of the Debtors creditors to whom the debtor owes fiduciary duties. In re JTR Corp., 958 F.2d 602, 604 (4th Cir. 1992); In re Enron Corp., 335 B.R. 22, 28 (S.D.N.Y. 2005) (court must, in considering a request to approve use of estate property under Section 363(b), expressly find a good business reason to grant such application, act[ing] to further the diverse interests of the debtor, creditors and equity holders.) (citing In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983)). 38. Under the Cash Collateral Order, the Debtors propose to provide adequate

protection by, among other things, paying or reimbursing the fees and expenses of the Representatives attorneys and other professional advisors in connection with matters relating to this Order and to the obligations hereunder, and the plan support agreement among the Floating Rate Lender and the Floating Rate Debtors. Cash Collateral Order, at 6(a)(i). As an initial matter, it is inappropriate to include these professional fees as adequate protection since the

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Debtors have not established that the underlying loan documents would provide for such reimbursement. See 11 U.S.C. 506(b) (To the extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim, there shall be allowed to the holder of such claim any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.) (emphasis added). Further, Appaloosa submits that, to the extent these professional services are rendered to terminate or oppose the Debtors use of cash collateral based on the Debtors seeking to negotiate a restructuring other than the Proposed Restructuring, reimbursement of such services would be contrary to the best interests of these estates.

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CONCLUSION Appaloosa is not objecting to the Debtors use of cash collateral (as long as its use is not conditioned upon the Proposed Restructuring), it is not objecting to the Debtors entry into the DIPs, and Appaloosa is certainly not objecting at this stage to a plan that has yet to be filed. However, Appaloosa is objecting to the Debtors attempt to bind themselves to an unnecessary agreement which has not been shown to benefit these estates. For the foregoing reasons, Appaloosa respectfully requests that this Court deny the Debtors request for authorization to (a) enter into the PSA, and (b) to condition the use of cash collateral as described above. Dated: New York, New York August 23, 2010 /s/ Lee S. Atttanasio Lee S. Attanasio SIDLEY AUSTIN LLP 787 Seventh Avenue New York, New York 10019 (212) 839-5300 (tel) (212) 839-5599 (fax) Counsel for Appaloosa Investment L.P. I

NY1 7379991v.1

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 10-13800-SCC
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In the Matter of:

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9

INNKEEPERS USA TRUST,

et al.,

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14 15

Debtors.

-x

United States Bankruptcy Court One Bowling Green New York, New York

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17

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July 20, 11:11 AM

2010

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24

BEFORE: HON. U.S. SHELLEY C. CHAPMAN

BANKRUPTCY JUDGE

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Page 72
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Q.

Okay.

Let's turn now to the proposed cash collateral and that's at pages 3 and 4. and then we can walk

2 3

reporting the company proposes, Can you summarize for the Court,

4
5
6

through the three different reporting, really, mechanisms we

propose?

A.

Sure.

We've essentially proposed three things,

one of

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9

which is a rolling thirteen-week consolidated cash flow forecast.

The second item is what we term a flash report which is a

10 11
12

report which is intended to be provided to all constituency, all lenders or servicers on a twice monthly basis to actually
provide to them actual disbursements on a retroactive basis

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15 16 17 18 19

after the cash has been disbursed. And then thirdly, forty-five days after a period end -- a
calendar period end, we would provide to them a full reconciliation of receipts and disbursements with a determination of net available cash that,
of things,

subject to a couple

one being an expense reserve for upcoming

expenditures that we know are coming or certain other items

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21 22

that we know that will influence the hotel operations on a goforward basis, after that expense reserve we would provide that

net excess cash to the lenders.

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Q.

Okay.

Let's -- on the rolling thirteen-week,

on the cash

basis,

is that on a consolidated or hotel by hotel basis?

A.

Consolidated basis.

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MR. DONOVAN:

Your Honor, objection.

I think this again

calls for whether or not Lehman would need to come to Your

Honor in order to kind of execute on it.

3
4

THE COURT:

Well I think he's positing that Lehman gets

that we 1 re at the moment where

5 6
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the approval or somehow does it,

the company can no longer use Lehrnan 1 s cash collateral.

MR. PARKINS: THE COURT: MR. PARKINS:

Your Honor? That's what I think he is getting at. Let me explain, if I may. The PSA i f

10
11

approved by Your Honor would provide for this. THE COURT: MR. PARKINS: I understand. So I am asking, assuming we get there and it

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15

was approved by Your Honor, and it happened, how would Midland

know how much --

THE COURT:

All right.

But you're also talking about

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something that by its terms cannot occur before we have the

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final hearing. MR. PARKINS: THE COURT: MR. PARKINS:

Q.
A. Q.

Absolutely, Your Honor. All right. Absolutely.

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How would that happen? How would what happen? Well, how would Midland know how much cash is going to be

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used to subsidize other borrowers?

A.

That would be used to subsidize other borrowers?

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Q.
A.

Yes,

if Lehman terminated its use of cash collateral?

Well the reporting would still be the same.

So the answer is it wouldn't know how to -- it wouldn't be

Q.

4
5
6

able to identify it immediately; is that correct?

A.

Not immediately. So let me see. So what you want to do is take the Midland

Q.

7 8 9 10 11 12
13

cash collateral that's being presently used through this lockbox, scramble the egg and consolidate it. And any event

any of these events happen down the road, not be able to unscramble the egg very quickly; is that true?
A.
Very quickly? I am not sure what the definition of very

quickly is again.
Q.
I would like to know where my cash is tomorrow, says

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Midland.
A.

Would I be able to know what it is?

No.

Tomorrow?

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MR. PARKINS: THE COURT: MR. DONOVAN:

Okay.

I pass the witness,

Your Honor.

All right.

Any redirect?

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Just briefly, Your Honor.

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REDIRECT EXAMINATION BY MR. DONOVAN: Q. Mr. Craven, during this lockbox period, when you had to
whose fund

fund an expense and Midland hadn't paid it yet, could you use? A.

We used funds from our consolidated cash position.

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EXHIBITD

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. Case No. 08-13555 08-01420 (JMP) (JMP) (SIPA)
-X

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6
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In the Matter of: LEHMAN BROTHERS HOLDINGS Debtors.

-X

INC.,

et al.,

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In the Matter of: LEHMAN BROTHERS Debtor.

-X

INC.,

u.s. Bankruptcy Court

One Bowling Green New York, New York

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19

20 21 22 23 24 25 BEFORE: HON. U.S. JAMES M.

August 18, 10:01 AM

2010

PECK

BANKRUPTCY JUDGE
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LBID, et al; LBI

Page 113
1 only a transaction which is reasonable in the business judgment

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7
8

of Lehman Commercial Paper but is one that is so highly contingent that it is difficult to apply the case law standards that have been cited by Ms. Strickland in her opposition to this motion. doubt. This is a 363 transaction; of that there is no

But it is not a sale of substantially all of the assets

of Lehman Commercial Paper, nor does it come close to that.

Indeed, it is barely a sale at all.

It is,

instead, approval

9 10 11
12

of an agreement which is highly contingent and subject, ultimately, to the judgment of my colleague, Judge Chapman, as well as to the vagaries of the Innkeepers bankruptcy case
itself, the future course of which is unpredictable.

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Whether or not this is the best deal that could have been arrived at in the context of what amounts to a prenegotiated filing of a bankruptcy case that includes elements that I don't know about and frankly -- I have enough on my own docket -- I don't choose to know about unless I need to, this
is a transaction that I accept represents a reasonable collar around the recoveries for Lehman in respect of its loans made

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in the Innkeepers bankruptcy.

Whether or not that turns out to

be a 107.5 million dollar outcome or some other outcome, I

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don't know, the fact that Lehman retains the ability to

transfer in its sole discretion the mortgage loans that are at issue here is a source of additional comfort to the Court.

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And with all respect to the argument that has been

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