HEARING DATE AND TIME: MARCH 8, 2011 AT 10:00 A.M.

Alan W. Kornberg Andrew J. Ehrlich PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1285 Avenue of the Americas New York, NY 10019-6064 Tel. (212) 373-3000 Fax (212) 757-3990 akornberg@paulweiss.com aehrlich@paulweiss.com Attorneys for Apollo Investment Corporation 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

STATEMENT OF APOLLO INVESTMENT CORPORATION REGARDING OBJECTIONS TO DEBTORS BID PROCEDURES MOTION Apollo Investment Corporation (AIC), by and through its counsel, hereby submits this statement (the Statement) in response to the objections of the Ad Hoc Committee of Preferred Shareholders (the Ad Hoc Committee) and other stakeholders1 (collectively, the Objectors) to Debtors Motion for Entry of Order (I) Authorizing Debtors to Enter into Commitment Letter with Five Mile Capital II Pooling REIT LLC, Lehman ALI Inc., and Midland Loan Services (Midland), (II) Approving New Party/Midland Commitment between Debtors and Midland Loan Services, (III) Approving Bidding Procedures, (IV) Approving Bid
1

The following parties filed objections (collectively, the Objections) to the Motion: Trimont Real Estate Advisors Inc., as Special Servicer; CWCapital Asset Management LLC and C-III Asset Management LLC; The Trusts and LNR Securities Holdings, LLC; the Official Committee of Unsecured Creditors; and Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd.

Protections, (V) Authorizing Expense Reimbursement to Bidder D, and (VI) Modifying Cash Collateral Order to Increase Expense Reserve [Dkt. No. 820] (the Motion):2 Statement 1. AIC supports the Debtors efforts to maximize the value of the estates

through the proposed commitment and process set forth in the Motion, and AIC has sought to work constructively with the Debtors, where and as appropriate. Throughout, AIC has remained cognizant of the concerns of certain stakeholders particularly the Ad Hoc Committee regarding AICs involvement in the Debtors chapter 11 cases. Thus, AIC has intentionally limited its role. In particular, those AIC employees who sit on Innkeepers Board of Directors recused themselves from any decision concerning the selection and terms of the stalking horse bid where their participation could give rise to any suggestion of impropriety. The AIC directors also supported delegating such decisions to an independent committee. Moreover, in the

interests of reaching a consensual reorganization, AIC has agreed to forego a recovery on account of its preferred shares. AIC also has chosen not to participate as a bidder in the current process. 3 In short, AIC has not improperly influenced the stalking horse bid process in any way, and the insinuations to that effect in the Ad Hoc Committees Objection should be rejected as not based in fact. 2. With respect to the concerns raised regarding the proposed release

provisions in the Term Sheet, AIC is confident that the Debtors will fully and persuasively establish the propriety of AICs release at the appropriate time, i.e., during the confirmation
2

All capitalized terms used but otherwise not defined herein shall have the meanings set forth in the Motion, Commitment Letter or Bidding Procedures, as applicable. Many of the Objections were filed under seal in accordance with an order of this Court. Accordingly, specific references to the Objections, along with certain testimony elicited during discovery in connection with the Motion, have been redacted. Unredacted copies will be made available to the Court and the parties.

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process. That day is not, however, today, and the objections regarding the release provisions are therefore premature. The only issue before the Court at this time is whether the Debtors selection of the stalking horse bid and development of the proposed Bidding Procedures satisfy the business judgment standard, and there is simply no evidence that AICs conduct or the parties decisions with respect to the AIC release render those actions improper. 3. For these reasons, AIC joins the Debtors in their response to the

Objections. However, to address the concerns that have been raised regarding AICs current role in these chapter 11 cases and the proposed AIC release, AIC also takes this opportunity to provide some additional information on these topics to assist the Court and parties in interest.4 I. AICs Role in the Stalking Horse Bid Selection Process and the Development of the Bidding Procedures Was Appropriate. 4. AIC has consciously acted to minimize concerns regarding its possible

influence on the bid process. Contrary to the Ad Hoc Committees suggestion that AIC has played an active and improper role during this process, AICs role has in fact been limited. The documents and testimony adduced during the recent discovery process make this clear. 5. In particular, AICs representatives on Innkeepers Board of Directors

recused themselves from voting on the proposed bid to ensure that there was no conflict of interest. See Declaration of Andrew J. Ehrlich (Ehrlich Decl.), Exhibit A, Deposition of Schuyler Hewes, at 56:2-24. The AIC directors expressed their support for the Debtors efforts to maximize the value of the estates, and supported the creation of an Independent Committee to design and run the stalking horse bid process. Id. It is the Independent Committee whose

AIC reserves all of its rights to respond more fully and present evidence concerning such release provisions and other matters as may be necessary at the appropriate time.

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members have no affiliation with AIC that selected the proposed stalking horse bid. AIC was not involved in, nor did AIC influence, the Independent Committees deliberations. 6. Second, the AIC release is one provision of a comprehensive restructuring

proposal that was negotiated at arms length between sophisticated parties. Schuyler Hewes, AICs representative, testified that the idea of the release was proposed after it became known to AIC that the Debtors were negotiating a plan that would provide a recovery to preferred shareholders, including AIC. Rather than claim its portion of the recovery for preferred

shareholders (which the Ad Hoc Committee states would be worth approximately $2 million under the current proposal), AIC proposed that it waive its right to a recovery in return for a release, including for any liability under the AIC Guaranty by Midland. Mr. Hewes testified that it was his understanding that this proposal was initially made to Marc Beilinson, the Debtors Chief Restructuring Officer. Ehrlich Decl., Ex. A, 31:13-32:8. AIC had no further involvement in the negotiations and never spoke with Midland directly about this proposal. Id. at 33:14-22. Indeed, AIC had no direct conversations with Midland, Lehman, or Five Mile about the stalking horse process. Although AIC representatives were kept apprised of developments in their roles as Innkeepers directors, they did not play an active role in negotiating with the bidders; that was left to the Debtors and their professionals. 7. Third, AIC is not seeking to invest in the reorganized Company. AIC was

not a bidder in the recent process, and Mr. Hewes testified that AIC has no interest in participating in the current process as a bidder. Id. at 59:23-60:11. AIC has had no

conversations with the Debtors, their counsel, their financial advisors or anyone else about purchasing an interest in the reorganized Innkeepers. Id. at 58:16-60:11. Any suggestion by the

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Objectors that AICs interest creates distracting and unfavorable uncertainty should be swiftly rejected. 8. Finally, when concerns were nevertheless raised concerning AICs role in

negotiating and selecting the stalking horse bid, AIC worked with the parties to prevent additional time-consuming and cost intensive litigation. To that end, AIC produced all relevant and non-privileged documents relating to the process and agreed to the deposition of a corporate representative, Schuyler Hewes, by an attorney for the Ad Hoc Committee and others. 9. In sum, AIC took all appropriate steps with respect to the Debtors

stalking horse process. The Ad Hoc Committees suggestions to the contrary are not supported by a single document, e-mail or shred of testimony. This point cannot be ignored: there is no evidence that AIC acted improperly in any way during the current process or in connection with the Bidding Procedures. II. The AIC Releases Are Appropriate. 10. The propriety of the releases that are proposed to be granted to AIC as part

of the Debtors plan need not be determined now. That will be established at confirmation, and AIC is confident that the Debtors will ably demonstrate that these provisions are appropriate and consistent with applicable law. AIC believes that the following facts will prove relevant to that analysis, and are useful to bring to light now: A. AIC is a Preferred Shareholder. 11. As this Court is aware, AIC owns 100% of Innkeepers 12% Series A

Cumulative Preferred Shares (the Series A Preferred Shares). Ehrlich Decl., Ex. A, 12:2113:3. The Series A Preferred Shares and the Series C Preferred Shares 30.5% of which are held by members of the Ad Hoc Committee rank pari passu with one another. This means

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that, absent the agreement set forth in the Term Sheet, AIC will share pro rata with any recovery to the Series C Preferred shareholders. 12. However, as explained above, AIC has agreed to waive all rights to

receive any recovery under the plan of reorganization that encompasses the Five Mile/Lehman Bid, including the right to participate in the Co-Investment Right. Motion at 57. Given the value to which AIC is entitled as the holder of the Series A Preferred Shares, this constitutes a significant concession on AICs part which AIC believes was important to reaching a comprehensive resolution of outstanding disputes. B. The AIC Guaranty Is of No Value to the Estates. 13. The Ad Hoc Committee objects to the proposed release of the AIC

Guaranty because it mistakenly believes the AIC Guaranty is a valuable asset of the estates. Indeed, the Ad Hoc Committee appears to value the AIC Guaranty at $44.3 million. See Ad Hoc Obj. at 36 ([T]he Debtors borrowed $44.3 million in DIP financing to satisfy property improvement obligations on hotels in the Midland Pool that [AIC] guaranteed). This is simply incorrect. 14. First, the improvements guaranteed by AIC are substantially fewer in

number, and substantially less in terms of estimated cost of completion, than the improvements to be performed with proceeds of the Debtors postpetition financing. The postpetition financing funds PIP Work, which is defined in a budget and timeline specifically developed to address the needs of the Debtors and their lenders during the pendency of these cases. The work outlined in that budget and timeline is not the same as the work guaranteed by AIC; indeed, neither document references the AIC Guarantys work schedule. 15. Mr. Hewes specifically testified to this point, noting that work covered by

the AIC Guaranty is significantly different than what is to be completed using the DIP proceeds.

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Ehrlich Decl., Ex. A, 22:12-24:4.

He also testified that, even where similar work was

guaranteed, those obligations changed significantly over time. Id. at 69:10-70:9. 16. Second, litigation concerning enforceability of the AIC Guaranty is likely

to be complex and protracted, and Midlands ability to recover under the Guaranty is uncertain. As the Ad Hoc Committee correctly notes, prior to the commencement of these cases, Midland sued AIC in state court on the AIC Guaranty. Ad Hoc Obj. at 36. however, was dismissed on the pleadings.5 That state court action,

See Midland Loan Services, Inc. v. Apollo

Investment Corporation, No. 601324/2010 (N.Y. Sup. Ct. Nov. 4, 2010) (granting AICs motion to dismiss). 17. Third, it is Midland and not the estates that benefits from the AIC

Guaranty. As Mr. Hewes testified, the company is not a party to the guarantee, so theyre not technically a direct beneficiary or a direct counterparty of the guarantee. Ehrlich Decl., Ex. A, 40:8-11. As such, under the terms of the AIC Guaranty, only Midland is able to pursue remedies and negotiate a settlement under the AIC Guaranty. Midland has done exactly that. 18. In light of these facts, and given the substantial value that AIC has agreed

to forego in exchange for the release, AIC believes that the proposed release of the AIC Guaranty will more than satisfy the requirements of the Bankruptcy Code and applicable law. Conclusion 19. The question presently before the Court is whether the Debtors

negotiation and selection of the stalking horse bid satisfies the business judgment standard. If so, the bid process they have developed should be allowed to continue for the benefit of all stakeholders. Unsupported allegations of bad faith or improper dealing by AIC provide no basis
5

At Hewes deposition, counsel for the Ad Hoc Committee acknowledged that that state court action was dismissed. See Ehrlich Decl., Ex. A, 39:9-22.

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on which to find that the Debtors have not acted within their sound business judgment in negotiating and selecting the stalking horse bid: AIC has not acted improperly or unduly influenced the Debtors decision-making, and there is no evidence to suggest otherwise. Nor do concerns over provisions of a plan that has not yet been filed provide a basis to halt the process the Debtors have developed, since the propriety of any particular term of a plan and its importance to the Debtors overall restructuring is a topic for confirmation. WHEREFORE, for the reasons set forth herein, AIC supports the Debtors request that the Court grant the Motion, and grant such other relief as is just and proper. Dated: New York, New York March 3, 2010 PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

By:

/s/ Alan W. Kornberg Alan W. Kornberg Andrew J. Ehrlich 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000

Attorneys for Apollo Investment Corporation

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Alan W. Kornberg Andrew J. Ehrlich PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1285 Avenue ofthe Americas New York, NY 10019-6064 Tel. (212) 373-3000 Fax (212) 757-3990 akornberg@paulweiss. com aehrlich@paulweiss. com

Attorneys for Apollo Investment Corporation

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

DECLARATION OF ANDREW J. EHRLICH

ANDREW J. EHRLICH declares as follows: 1. I am licensed to practice law in the State of New York. I am a partner in

the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP, counsel for Apollo Investment Corporation. I submit this declaration in support of the Statement of Apollo Investment I have personal

Corporation Regarding Objections to Debtors' Bid Procedures Motion.

knowledge of the facts set forth herein and, if called upon to do so, would testify completely thereto.

2.

Attached hereto as Exhibit A is a true and correct copy of the Deposition

Transcript of Schuyler Hewes, dated February 16, 2011. I declare under penalty of perjury that the foregoing is true and correct. Dated: March 3, 2011

EXHIBIT A

[REDACTED]