Hearing Date: September 30, 2010 at 10:00 a.m. (EDT) Objection Deadline: September 23, 2010 at 5:00 p.m.

(EDT)

HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, NY 10020 Telephone: (212) 659-7300 Facsimile: (212) 918-8989 Lenard M. Parkins (NY Bar #4579124) John D. Penn (NY Bar # 4847208, admitted pro hac vice) Mark Elmore (admitted pro hac vice) Attorneys for Midland Loan Services, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

NOTICE OF HEARING ON LIMITED MOTION TO RECONSIDER FINAL ORDER AUTHORIZING THE DEBTORS TO (I) USE THE ADEQUATE PROTECTION PARTIES CASH COLLATERAL AND (II) PROVIDE ADEQUATE PROTECTION PARTIES PURSUANT TO 11 U.S.C. 361, 362, AND 363 PLEASE TAKE NOTICE that a hearing to consider the relief requested in the Limited Motion of Midland Loan Services, Inc. (Midland), To Reconsider Final Order Authorizing The Debtors To (I) Use The Adequate Protection Parties Cash Collateral And (II) Provide Adequate Protection Parties Pursuant To 11 U.S.C. 361, 362, And 363, dated September 16, 2010, shall be held before the Honorable Shelley C. Chapman of the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) on September 30, 2010, at 10:00 a.m. (EDT), or as soon thereafter as counsel may be heard. PLEASE TAKE FURTHER NOTICE THAT responses or objections, if any, to the Motion and the relief requested therein shall be made in writing, shall state with particularity the

grounds therefor, shall conform to the Federal Rules of Bankruptcy Procedure and the Local Bankruptcy Rules for the Southern District of New York, and shall be filed with the Bankruptcy Court electronically in accordance with General Order M-242 (N.B. General Order M-242 and the Users Manual for the Electronic Case Filing System can be found at

www.nysb.uscourts.gov, the official website for the United States Bankruptcy Court for the Southern District of New York) by registered users of the Bankruptcy Courts electronic filing system, and, by all other parties in interest, on a 3.5 inch disk, preferably in Printable Document Format (PDF), WordPerfect or any other Windows-based word processing format (with a hard copy delivered directly to Chambers) and served in accordance with General Order M-242 or otherwise so as to be actually received no later than 5:00 p.m. (EDT) on September 23, 2010 by: (i) Haynes and Boone, LLP, Attorneys for Midland, 1221 Avenue of the Americas, 26th Floor, New York, New York, 10020 (Attn: Lenard M. Parkins, Esq.); (ii) Kirkland & Ellis, LLP, Attorneys for the Debtors, 601 Lexington Avenue, New York, New York 10022 (Attn: Jennifer Marines and Paul M. Basta, Esq.); (iii) the Office of the United States Trustee, 33 Whitehall Street, New York, New York 10004 (Attn: Paul Schwartzberg, Esq.); and (iv) Morrison & Foerster LLP, Attorneys for the Official Committee of Unsecured Creditors, 1290 Avenue of the Americas, New York, New York 10104 (Attn: Lorenzo Marinuzzi, Esq.).

N-106845_1.DOC

PLEASE TAKE FURTHER NOTICE that if no objections are filed and served as prescribed herein, the relief requested by Midland may be granted without further hearing or notice. Dated: New York, New York September 16, 2010 HAYNES AND BOONE, LLP

/s/ Lenard M. Parkins Lenard M. Parkins (NY Bar #4579124) Mark Elmore (admitted pro hac vice) 1221 Avenue of the Americas, 26th Floor New York, NY 10020-1007 Telephone No.: (212) 659-7300 Facsimile No.: (212) 884-8211 - and John D. Penn, Esq. (NY Bar # 4847208, admitted pro hac) Haynes and Boone, LLP 201 Main Street, Suite 2200 Fort Worth, Texas 76102 Telephone No.: (817) 347-6610 Facsimile No.: (817) 348-2300

ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.

N-106845_1.DOC

Objection Deadline: Sept. 23, 2010 Hearing Date: Sept. 30, 2010 at 10:00 a.m. HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, NY 10020 Telephone: (212) 659-7300 Facsimile: (212) 918-8989 Lenard M. Parkins (NY Bar #4579124) John D. Penn (NY Bar # 4847208, admitted pro hac vice) Mark Elmore (admitted pro hac vice) Attorneys for Midland Loan Services, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

LIMITED MOTION TO RECONSIDER 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, 362, AND 363 Midland Loan Services, Inc. (Midland),1 in support of its Limited Motion to Reconsider Final Cash Collateral Order, represents as follows: JURISDICTION
1

Midland is the special servicer pursuant to the Pooling and Servicing Agreement dated as of August 13, 2007 (the Special Servicing Agreement) for that certain secured loan in the amount of not less than $825,402,542 plus interest, costs and fees (the Fixed Rate Mortgage Loan) owed by certain of the above referenced Debtors. The Fixed Rate Mortgage Loan was made pursuant to that certain loan agreement dated as of June 29, 2007 (as amended, the Fixed Rate Mortgage Loan Agreement), and is evidenced by (i) a certain Replacement Note A-1 and (ii) a certain Replacement Note A-2, each dated as of August 9, 2007, and each in the original principal amount of $412,701,271. Replacement Note A-1 was assigned to LaSalle Bank National Association as trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007-C6. Bank of America, N.A. is the successor-in-interest to LaSalle Bank National Association (the Fixed Rate Trustee). Replacement Note A-2 is currently held by the trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007-C7.

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1.

This Court has jurisdiction over this Motion pursuant to 28 U.S.C 157 and

1334, 11 U.S.C. 363 and 507 and Bankruptcy Rules of Procedure 4001 and 9023. This is a core proceeding pursuant to 28 U.S.C. 157. The predicates for the relief sought herein are 11 U.S.C. 363 and Federal Rule of Civil Procedure 59 made applicable by Federal Rule of Bankruptcy 9023. FACTUAL BACKGROUND 2. On September 2, 2010, this Court entered its 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, 362, and 363, (Cash Collateral Order) (docket no. 402). The Cash Collateral Order includes two provisions that should be reconsidered. Paragraph 7 on p. 34, describes a Carve Out of $5.5 million that would be a reduction in the collateral of secured creditors like Midland. Paragraph 6(c) on p. 28, indicates that the provisions of 11 USC 507(b) regarding claims arising for the failure of adequate protection does not apply in these cases. Specifically, it provides, Notwithstanding anything to the contrary in this Order, neither Avoidance Actions nor the proceeds therefrom shall be available for the payment of any 507(b) Claims or other super-priority administrative claims asserted by the Adequate Protection Parties. These provisions are improper and should be excised from the Cash Collateral Order. 3. As noted in prior pleadings, Midland is extremely concerned about both the

amount of the professional fees being borne by the Debtors estates as well as the services those fees represent.2 The cumulative fees include those incurred by the Debtors professionals,
2

The Debtors recently filed their Schedules of Assets and Liabilities. A preliminary review of the Schedule of Liabilities indicates that the total trade claims (before removing claims that might have been

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counsel for the Creditors Committee and those that might be incurred by financial advisors to the Creditors Committee and professionals that might be engaged should an examiner or preferred shareholder committee be appointed. Fees charged by these professionals deplete the estates cash and are uses of Midlands cash collateral that neither improve nor maintain Midlands collateral. CARVE OUT 4. As it is generally understood, a carve out can exist in only a few situations. For

an oversecured creditor, a carve out from its collateral may be so limited that the creditor remains oversecured. Likewise, a secured creditor may always consent to have part of its collateral applied to something other than to reduce its claim. However, where (as here) the Debtors actions indicate that it considers Midland to be undersecured, a carve out may only be granted with the Midlands consent or if Midland is otherwise adequately protected by replacing the value lost through the Carve Out.3 5. By definition, the Carve Out applies only in a crisis situation a Carve Out

Trigger Notice is delivered to notify the Debtors that a Termination Event occurred which prevents them from using cash collateral in the future. (Cash Collateral Order 10.) The Carve Out should be used solely to wind down the Debtors operations with little or no expectation of future operations. At that point in time, the Debtors would have a very limited ability to fund any operations.

satisfied through payments pursuant to 1st Day Orders and those entitled to administrative claim status under Sec. 503(b)(9)) appear to be less than $2 million. If this is accurate, the possibility exists that the fees and expenses of the Creditors Committee professionals will exceed the total claims of their constituents.
3

In these cases, the latter is merely an academic exercise. If unencumbered assets were available to replace the value lost via the Carve Out, there would never be any need (or place) for the Carve Out in the first instance.

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6.

In the instant cases, all of the Debtors actions to date indicate that they consider

Midland and their other secured creditors to be undersecured. As such, cash drained from a lenders collateral to fund professional fees will never be never replaced and for which there is neither compensation nor adequate protection. No assets are available to replace cash collateral used to pay estate professional fees. This is particularly true with respect to any cash that might be consumed via the Carve Out. The Debtors never introduced evidence or provided argument from which the Court could conclude that Midland would be adequately protected if its collateral were invaded for all or any part of the Carve Out. 7. Midland never consented to the Carve Out. The Debtors never provided

testimony that either the amount or the terms of the Carve Out were ever negotiated with any parties, including Midland. Likewise, there was never testimony that the amount of the Carve Out was based on an estimate of reasonable wind down costs. 8. The Carve Out, as it might be applied to Midland and its collateral, should be

excised from the Cash Collateral Order because the Debtors have not satisfied their burden to justify its amount, to justify its usage, to show Midlands consent or to prove that there is any adequate protection for the funds used to pay estate professional fees without Midlands consent.4 SECTION 507(b) 9. 11 U.S.C. 507(b) provides, quite simply,

If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim

Midland reserves its right to object to all or any part of any attempt to surcharge its collateral (including its cash collateral) to pay professional fees.

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allowable under subsection (a)(2) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor's claim under such subsection shall have priority over every other claim allowable under such subsection. (Emphasis added.) The statute contains no exceptions from this provision. The statute does not state that it applies unless the Court, for cause, orders otherwise or any similar language found with respect to other provisions in the Bankruptcy Code. The section is self-effectuating and applies whenever adequate protection is provided and thereafter proves to be inadequate. Section 507(b) applies to a situation where funds representing the cash collateral of an undersecured creditor are actually used. If replacement liens or other forms of adequate protection fail, funds derived as a result actually of using the carve out would be one example of when the 507(b) super-priority claim would arise. 10. Paragraph 21 of the Cash Collateral Order provides, in part, Section 507(b)

Reservation. Nothing herein shall impair or modify the application of section 507(b) of the Bankruptcy Code in the event that the adequate protection provided to the Representatives hereunder is insufficient to compensate for any diminution in value of their respective Prepetition Collateral during the Chapter 11 Cases or any Successor Cases. The language in 6(c) would impair the application of 507(b) of the Bankruptcy Code by precluding certain property of the estate from being available to satisfy such claims. 11. Accordingly, it is respectfully submitted that this Court lacks the statutory

authority to shield estate assets from 507(b) claims. The provision of the Cash Collateral Order that purports to earmark, isolate or exempt certain assets from being used to satisfy

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507(b) claims conflicts with other provisions of the Cash Collateral order, is without any legal underpinning, and should likewise be excised from the Cash Collateral Order. LEGAL AUTHORITIES 12. Pursuant to Bankruptcy Rule 9023 and Federal Rule of Civil Procedure 59 a party

may move the court to amend a judgment within fourteen days after entry of the order. A. 13. Cash Collateral Carve Out is Impermissible The Second Circuit has long held that the payment of administrative expenses,

such as professional fees, is the responsibility of the debtors estate, not its secured creditors. Gen. Elec. Credit Corp. v. Levin & Weintraub (In re Flagstaff Foodservice Corp.), 739 F.2d 73, 76 (2d Cir. 1984). Further, unless the creditor is oversecured, the administrative expenses of a debtors case are not to be charged against his collateral because a secured creditors interest in collateral is a property right which is not impaired in bankruptcy proceedings. In re 680 Fifth Ave. Assocs., 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993). Of course, courts have recognized that a secured creditor may agree to the use of its cash collateral for the payment of administrative expenses by way of a carve out, but nothing in the bankruptcy code requires this consent. BII, Inc. v. Chapter 7 Trustee for IBI Security Serv., Inc. (In re IBI Sec. Serv., Inc.), 133 F.3d 205, 208 n. 4 (2d Cir. 1998) (defining a carve out as a consensual agreement by a creditor holding a secured or super-priority claim to earmark funds for the payment of estate professionals whose claims would ordinarily be of a lower priority); see also In re Hotel Syracuse, Inc., 275 B.R. 679, 683 n. 4 (Bankr. N.D.N.Y. 2002) (the term carve out refers to an agreement by a party secured by all or some of the assets of the estate to allow some portion of its lien proceeds to be paid out to others, i.e., to carve out of its lien position). (emphasis added.)

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14.

Where a secured party does not consent to the use of its collateral, such as by an

agreed carve out, the secured creditors collateral may only be charged for administrative expenses, including attorneys fees, to the extent these expenses directly benefited that secured creditor. In re Blackwood Assocs., L.P., 153 F.3d 61, 68 (2d Cir. 1998). Specifically, the trustee or debtor in possession must meet the criteria laid out in 11 U.S.C. 506(c). In re 680 Fifth Ave. Assocs., 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993). Section 506(c) contains the following three criteria: (1) the expenditure is reasonable; (2) the expenditure is necessary in preserving or disposing of the secured creditor's collateral; and (3) the secured creditor benefits directly from the expenditure. In re 680 Fifth Ave. Assocs., 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993). In 680 Fifth Ave., Judge Brozman noted that a professional must forego compensation and reimbursement of expenses if an estate has no unencumbered assets and the professional is unable to prove the secured partys consent or compliance with 506(c). 154 B.R. 38, 43 (Bankr. S.D.N.Y. 1993) 15. Midland has never agreed to a carve out of the use of its cash collateral. As the

Second Circuit noted in Flagstaff, the payment of administrative expenses is the responsibility of the debtors estate, not its secured creditors. 739 F.2d at 76. Therefore, the only way that Midlands cash collateral can be surcharged for those fees is if Midland benefits directly from the expenditure. In re 680 Fifth Ave. Assocs., 154 B.R. at 43. The Court has no evidence from which it could conclude that Midland would benefit from work conducted or to be conducted by the Debtors professionals and therefore the Cash Collateral Order should be amended by removing the carve out language. B. Estate Assets Cannot be Exempted or Protected from Satisfying Claims

Allowed Pursuant to 507(b) of the Bankruptcy Code

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16.

Section 507(b) states that where, despite a courts grant of adequate protection, a

secured creditors collateral declines in value thus giving the secured creditor a claim under 507(a), that such claim shall have priority over every other claim allowable. 11 U.S.C. 507(b). Where Congress has intended for the bankruptcy courts to use discretion in fashioning equitable exceptions to priority rules it has made this intention explicit. In the case of 507(b) Congress made it clear that no such discretion is granted to the court both by omitting language that would provide for such discretion, and also by unambiguously stating that claims under 507(b) shall have priority over every other claim allowable.5 17. Section 507(b) does not provide bankruptcy courts with the discretion to exempt

selected estate assets from satisfying priority claims including the super-priority claim provided for secured creditors when the Court-provided adequate protection fails. Any

exception to the priority status of a 507(b) claim is not only contrary to the plain language of the statute, but such an exception undermines the very purpose of 507(b). The super-priority claim of 507(b) arises only in the situation where adequate protection has failed and the remainder of the estate compensates for that failure. 18. Also, as a policy matter, Midland respectfully submits, the Court should tread

cautiously into the area of isolating or earmarking assets from priority (and super-priority

One scholar, noting this lack of discretion has stated [507(b)] is worded such that the special priority is mandatory: If the creditor proves an inadequate protection claim under subsection (a)(1), then such creditors claim...shall have priority over every other claim allowable under such subsection. The court has no equities exception from the special priority under section 507(b) as it does with regard to a post-petition lien upon products and proceeds under section 552(b). To reduce the amount of the claim by a carve out over the objection of the creditor violates the plain terms of section 507(b). If the creditor wants to give up a portion of its recovery to other parties, or waive its priority, it may do so, but an involuntary sharing arrangement or exception would deny the creditor a part of its recovery under section 507(b). James S. Cole, The Carve Out From Liens and Priorities to Guarantee Payment of Professional Fees in Chapter 11, 1993 DET. C.L. REV. 1501, 1538 (1993).

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claims). Doing so creates a claim priority arrangement that runs afoul of the priorities created by Congress. Had the Court chosen to marshal the estates assets in a way that would not disburse certain proceeds unless and until all of the estates other assets had been used to fund superpriority claims (or a date certain, whichever occurs sooner), the provision might pass muster. It is unsupportable to completely isolate and insulate part of an estate from funding certain creditor claims that are specifically creatures of the Bankruptcy Code. Also, the apparent conflict

between the provisions in 6(c) and 21 of the Cash Collateral Order should be resolved. 19. The Cash Collateral Order should therefore be amended to remove the language

making the proceeds from avoidance actions unavailable for payment of 507(b) claims. Local Rule 9013-1(a) 20. This pleading includes citations to the applicable rules and statutory authorities

upon which the relief requested herein in predicated and a discussion of their application to this pleading. Accordingly, Midland submits that this pleading satisfies Local Bankruptcy Rule 9013-1(a).

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CONCLUSION WHEREFORE, Premises Considered, Midland respectfully requests that this Court (i) reconsider the Final Cash Collateral Order, (ii) excise the Carve Out and limitation upon the source of payment of claims under 11 U.S.C. 507(b) and (iii) grant such other relief as is necessary or appropriate. Dated: September 16, 2010 New York, New York HAYNES AND BOONE, LLP /s/ Lenard M. Parkins Lenard M. Parkins (NY Bar #4579124) Mark Elmore (admitted pro hac vice) 1221 Avenue of the Americas, 26th Floor New York, NY 10020-1007 Telephone No.: (212) 659-7300 Facsimile No.: (212) 884-8211 - and John D. Penn, Esq. (NY Bar # 4847208, admitted pro hac vice) Haynes and Boone, LLP 201 Main Street, Suite 2200 Fort Worth, Texas 76102 Telephone No.: (817) 347-6610 Facsimile No.: (817) 348-2300 ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.

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