James H.M. Sprayregen, P.C. Paul M. Basta Stephen E. Hessler Brian S.

Lennon KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. Todd M. Schwartz KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DEBTORS OBJECTION TO MIDLAND LOAN SERVICES MOTION TO REQUIRE DEBTORS TO COMPLY WITH SECTIONS 363 AND 503 OF THE BANKRUPTCY CODE1

The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.

K&E 18886453

Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors) submit the following objection to Midland Loan Services, Inc.s Motion to Require Debtors to Comply with Sections 363 and 503 of the Bankruptcy Code [Docket No. 1110].2 Introduction Midlands motion is unsupported by fact or law and is premature. Midlands alleged grievance is that the Debtors are somehow trying to make payments under a proposed management incentive program without notice to creditors or approval by the Court. This is simply false. The proposed management incentive program for the Debtors chief restructuring officer is critical to maximizing value and is not in any way inconsistent with the Bankruptcy Code. On April 8, the Debtors filed their Disclosure Statement and Plan, both of which expressly stated the Board has approved a proposed management incentive program that shall be subject to Court approval (and thus also creditor objection) at the confirmation hearing (tentatively scheduled to occur on June 23), if not sooner via separate motionand that payments under the program shall take place on the plan effective date.3 In other words, the Debtors have provided more notice (up to two-and-a-half months) than required under Bankruptcy Code, with zero curtailment of the rights of Midland (or any other party in interest)

The Ad Hoc Committee of Preferred Shareholders filed a joinder to Midlands motion on April 25, 2011 [Docket No. 1147]. See Disclosure Statement for Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, filed on April 8, 2011 [Docket No. 1093] (the Disclosure Statement), Article IV.G.; Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, filed on April 8, 2011 [Docket No. 1094] (the Plan), Article IV.J.

to object as it may deem necessary. Accordingly, the Debtors respectfully request that the Court deny Midlands motion. Objection I. Midland Provides No Legal Support for the Relief Requested. Midland correctly notes that section 363 of the Bankruptcy Code requires notice to creditors and approval by the court for non-ordinary course transactions, and that section 503 imposes certain requirements for the payment of administrative claims for insiders. And, as required by those provisions, the Debtors Disclosure Statement and Plan provide the requisite notice the proposed management incentive program will be subjected to court review and approval, through either a standalone motion or confirmation. Any argument the Debtors have not yet made the requisite factual showing to justify the program is premature. Notably, Midland does not cite any statutory or precedential authority for the specific relief it is requesting: that the Debtors should be required to seek approval of the proposed management incentive program in a standalone motion (instead of through the Plan), and that the Debtors should be judicially compelled to do so immediately (instead of at the confirmation hearing). While sections 363 and 503 may establish the framework under which the proposed management incentive program ultimately must be approved, nothing in those provisions requires or justifies the specific relief requested in Midlands motion.4

To further illustrate the inapposite underlying premise of Midlands motion, consider that, to confirm their Plan(s), the Debtors ultimately will need to satisfy every applicable element of section 1129but the fact the Debtors have not yet made this comprehensive presentation, two months in advance of the relevant hearing date, does not give rise to a credible argument the Debtors should somehow be required to file their confirmation brief immediately.

II.

The Debtors Are Properly Exercising Their Business Judgment To Determine How And When To Seek Approval Of The Proposed Management Incentive Program. The Debtors intend to satisfy all applicable statutory requirements when they seek

approval of the proposed management incentive program, and in fact may seek to have the program approved in a standalone motion. But sections 363 and 503 do not dictate or

circumscribe the business judgment of the Debtors (and solely the Debtors) to determine whether and when to do so via standalone motion or plan confirmation. Indeed, section 1123(b)(6) of the Bankruptcy Code permits a plan of reorganization to include any appropriate provision not inconsistent with the Bankruptcy Code and debtors routinely seek approval of management incentive programs though a plan of reorganization rather than by standalone motion. See, e.g., In re Neff Corp., No. 10-12610 (Bankr. S.D.N.Y. 2010) (SCC); In re The Readers Digest Assoc., No. 09-23529 (Bankr. S.D.N.Y. 2009) (RDD); In re Tronox Inc., No. 09-10156 (Bankr. S.D.N.Y. 2009) (ALG); In re Masonite Corp., No. 09-10844 (Bankr. D. Del. 2009) (PJW); In re The Majestic Star Casino, LLC, No. 09-14136 (Bankr. D. Del. 2009) (KG); In re Hawaiian Telcom Commun., Inc., No. 08-02005 (Bankr. D. Haw. 2008) (LK). The Debtors have thus far exercised properly, and will continue to exercise properly, their business judgment on this issue. The Debtors Compensation Committee began developing the proposed management incentive program in mid-March 2011, after the Court approved the bidding procedures order.5 At that time, the Compensation Committee recognized the importance of incentivizing the Debtors chief restructuring officer, given that his existing employment agreement had expired on January 31, 2011, in the midst of the Debtors stalking horse selection process. Indeed, the

As such, Midlands allegation that the Debtors deliberately withheld information regarding the management incentive plan during negotiations of the Commitment Letter is baseless.

Debtors are in a critical phase of these chapter 11 cases now and need the unqualified attention, focus, and dedication of the chief restructuring officer if these cases are to end successfully. The Compensation Committee and Board approved the proposed management incentive program in early April 2011, but only after reviewing multiple reports from their compensation consultants and after considering advice from their counsel regarding the process for seeking approval of such compensation programs. The program fairly and appropriately compensates the chief restructuring officer given the vital role he will play during the rest of these proceedings. From the outset, the Compensation Committee and Board carefully considered all implications of their decision. Given the sensitivities of the proposed management incentive program (as evidenced by the Motion), the Compensation Committee and the Board were specifically motivated to avoid the possibility of contentious litigation that hypothetically could have a chilling effect on the marketing and bidding process. At the same time, the Debtors wanted to put all constituents on notice of the proposed management incentive program as early as possible, provide the Debtors ample time to continue socializing the program with key constituents (in the hope of obtaining consensus and avoiding unnecessary and costly litigation), and, if necessary, provide parties ample time to object to the program. Equally important, the Compensation Committee and Board wanted to assure the chief restructuring officer they support his continuing efforts during these phases of the chapter 11 cases and they are equally supportive of properly incentivizing him through the proposed incentive plan. The Debtors believe the best way to accomplish those goals is by seeking approval of the incentive program through the Plan. By contrast, proceeding by motion, at the height of the auction process, risks time-consuming and counterproductive litigation. And in the further responsible exercise of their business

judgment, the Debtors expressly reserved the flexibility, if circumstances warrant, to change course and proceed by motion instead. Midland argues the Debtors should seek approval of the proposed management incentive program, and do so on an expedited basis, so that bidders will know its full and final terms prior to the auction scheduled for May 2, 2011. But this is a red herring. Bidders were provided copies of the Plan and are on notice of the proposed management incentive program. No bidder has indicated to the Debtors that the proposed program is an obstacle to their participation in the auction process. Moreover, each bidder is free to address the proposed management incentive program in its bid as it sees fit. Against such backdrop, Midlands complaints ring hollow. Midland also alleges the Debtors jeopardize confirmation by exposing the Plan to objections to the program. But again, this is nothing more than speculation and not a legal basis to compel the Debtors to take an approach that Midland might find more desirable. The Debtors recognize Midlands role as the Debtors largest secured creditor and appreciate the significance of Midlands support for restructuring the Debtors that own or operate the hotels securing the Debtors fixed and floating rate mortgage loan pools. But Midland should not be permitted to impose requirements that do not appear in the Bankruptcy Code and are counterproductive under the circumstances of these cases. The Debtors have provided ample notice to Midland (and all other parties in interest) of the Debtors intent to seek court approval of the proposed management incentive planand all parties retain all rights to object accordingly. The relief requested by Midland therefore is not needed to protect Midlands rightsthough if granted, would operate to impair the Debtors rights to prosecute their chapter 11 cases according to their business judgment. For these reasons, the Debtors respectfully request that the Court deny Midlands motion.

New York, New York Dated: April 25, 2011

/s/ Brian S. Lennon James H.M. Sprayregen, P.C. Paul M. Basta Stephen E. Hessler Brian S. Lennon KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. Todd M. Schwartz KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession