10000005121

Hearing Date and Time: June 23, 2011 at 10:00 a.m.

David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC 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)

FIVE MILE CAPITAL PARTNERS LLC’S REPLY TO LIMITED CONFIRMATION OBJECTION FILED BY LNR PARTNERS, LLC AND LNR SECURITIES HOLDINGS, LLC TO: THE HONORABLE SHELLEY C. CHAPMAN UNITED STATES BANKRUPTCY JUDGE Five Mile Capital Partners LLC and its affiliates (collectively, “Five Mile”) hereby files this reply to the limited confirmation objection (the “LNR Objection”) filed by LNR Partners, LLC, LNR Securities Holdings, LLC and the securitization trusts for which LNR Partners, LLC serves as special servicer (collectively, “LNR”), and respectfully states as follows:

PRELIMINARY STATEMENT1 LNR opposes the releases the Debtors propose granting to Five Mile (and, Five Mile only). While LNR claims that it is objecting solely to ensure the Plan complies with applicable precedent, that clearly is not the case. Rather, it is evident that LNR, for some unknown reason, is targeting Five Mile and attempting to use LNR’s role as special servicer for certain “sister properties” as a last ditch attempt to exact some ill-conceived vengeance against Five Mile, a party that has brought massive value to the estates during the course of these cases. LNR’s motivations are highlighted by the fact that LNR (a) challenges only Five Mile’s releases, ignoring the myriad of other parties receiving releases under the Plan, including LNR itself, and ignoring that Five Mile’s releases are a component of the overall compromise in the Plan and (b) attacks non-Debtor releases given to Five Mile in the Plan by anybody, including those that have absolutely no bearing on LNR or any claims it could concoct. The Court should not countenance LNR’s bullying tactics that accomplish absolutely nothing and drain estate resources, especially as LNR’s lawyers continue to be paid by these estates for this harassing and frivolous exercise. Despite numerous discussions with LNR and the Debtors, Five Mile is still unaware of a single claim that LNR is worried about releasing -- which makes LNR’s tactics all the more troubling. Based on what LNR says it holds, it is (1) a certificateholder in the C6 and/or C7 Trusts holding the Fixed Rate Mortgage; (2) plaintiff in the CRES/LNR Litigation; and (3) special servicer for certain of the “sister properties”. The Plan is absolutely clear that as certificateholder and litigation plaintiff, LNR does not release Five Mile. LNR, as special servicer, is not a Fixed/Floating Releasing Party and, therefore, is not releasing Five Mile under the Fixed/Floating Debtors’ Plan General Release. Which begs the question: what other claims
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Capitalized terms used but not defined in this Preliminary Statement are ascribed the definitions elsewhere in this reply.

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does LNR hold that give rise to its objection? If none exist, then LNR’s theoretical exercise is utterly wasteful and everybody’s time and resources are better spent attending to real issues by parties with actual grievances. Tellingly, Midland, Lehman and the Official Committee of Unsecured Creditors – whose constituents are affected by Five Mile’s releases – support Five Mile’s releases. Five Mile’s releases should be approved because each and every one is permissible and falls in line with the Second Circuit’s Metromedia holding and with cases in this jurisdiction applying that standard. The record in these cases reflects Five Mile’s extensive and unique contribution to the Debtors, their estates and the Plan. That contribution flows directly to the parties providing Five Mile releases, including Lehman, Midland and the unsecured creditors, and therefore enjoys almost universal support. It continues to benefit them especially because Five Mile serves as back-up bidder and stands ready and willing to proceed with a transaction should the one in the Plan fail to timely close. Indeed, Five Mile’s contributions are acknowledged by the Debtors’ agreement in the Court-approved March 9, 2011 commitment letter to include Five Mile’s third-party releases in any plan submitted for Court approval. Moreover, the LNR Objection should be overruled because, based on LNR’s known holdings, it lacks standing to challenge releases granted to Five Mile under the Fixed/Floating Plan. Indeed, the only item LNR may have standing to oppose is the limited exculpation granted under Remaining Debtors’ Plan, which is clearly justified given Five Mile’s numerous contributions to these cases, as discussed below. For the reasons set forth herein, Five Mile respectfully requests that the Court overrule the LNR Objection, confirm the Plan and approved Five Mile’s releases.

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JURISDICTION 1. The United States Bankruptcy Court for the Southern District of New York (the

“Court”) has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. BACKGROUND2 A. General Background 2. On July 19, 2010 (the “Petition Date”), each of the debtors in the Bankruptcy

Cases (the “Debtors”) filed a petition with the Court under chapter 11 of the Bankruptcy Code commencing the Bankruptcy Cases. The Debtors are operating their businesses and managing their properties as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 3. On the Petition Date, the Debtors filed numerous first day motions, including

motions for authority to enter into the debtor in possession facility with Five Mile (the “Five Mile DIP”). On September 2, 2010, the Court entered a final order approving the Five Mile DIP. Pursuant to the Five Mile DIP, Five Mile loaned the Debtors $53,000,000, which remains outstanding. B. The LNR/CRES Litigation 4. On October 27, 2010, LNR filed a complaint and temporary restraining order in

the Supreme Court of the State of New York seeking, among other things, specific performance

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Five Mile assumes the Court’s familiarity with the facts leading up the Plan, which are set forth in detail in numerous pleadings including the Disclosure Statement (as defined below) and in the Five Mile Bidder’s Application Pursuant to Sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code for Allowance and Payment of Administrative Expense Claims (the “Substantial Contribution Application”) [Docket No. 1643], filed on June 8, 2011, which was original set to be heard at the confirmation hearing, but at the Debtors’ request, was adjourned to the July 21, 2011 omnibus hearing. A copy of the Substantial Contribution Application is attached hereto as Exhibit A and is incorporated herein by reference.

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and/or preliminary injunctive relief requiring CRES Investment No. II, LP (“CRES”), to terminate Midland Loan Services, Inc. as special servicer for the Fixed Rate Pool Mortgage Loan and appoint LNR as special servicer for the Fixed Rate Pool Mortgage Loan. See LNR Partners, LLC v. CRES Investment No. II, LP, Case No. 651850-10 (N.Y. Sup. Ct. Oct. 27, 2010). The action was removed to the Bankruptcy Court on November 10, 2010. See LNR Partners, LLC v. CRES Investments No. II, LP, Adv. Proc. No. 10-04237 (the “LNR/CRES Litigation”). 5. In the LNR/CRES Litigation, LNR sought to compel CRES to terminate Midland

as the special servicer of the Fixed Rate Pool Mortgage Loan and to pay damages to LNR for CRES’s alleged breach of contract in failing to appoint LNR as special servicer. LNR also filed a motion requesting a preliminary injunction to replace Midland as special servicer. CRES filed a motion to dismiss the complaint and opposed LNR’s request for injunctive relief. At a hearing held on December 16, 2010, the Bankruptcy Court denied LNR’s request for equitable and injunctive relief, finding that LNR had an adequate remedy at law in the form of monetary damages. The parties are currently awaiting a decision by the Bankruptcy Court on CRES’s motion to dismiss and the matter remains sub judice. C. Five Mile Plays A Vital Role In These Cases 6. Five Mile played a vital role throughout these cases. Its contributions (as lead

party in the bidding group that served as stalking horse bidder) are detailed in the Substantial Contribution Application. Chief among them: (1) Five Mile’s ability to bring Midland and Lehman – the Debtors’ two largest creditors – into a deal paved the way for the consensual reorganization embodied in the Plan, (2) Five Mile’s stalking horse bid, and its agreement to expose its bid to unprecedentedly long timeframes of open marketing, delivered massive value to the Debtors’ constituents and (3) Five Mile’s extensive negotiations with Midland, Lehman and

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the Debtors and its work documenting the agreement reached in the Commitment Letter, various pleadings, the Plan, the Disclosure Statement and other related documents, provided the framework for the highly-beneficial successful bids and for the structure of the Plan. Moreover, Five Mile’s agreement to finance the Debtors by extending the Five Mile DIP enabled the Debtors to perform vital property improvement projects to preserve the value of their assets. D. The Plan 7. On May 9, 2011, the Debtors filed the Disclosure Statement for Debtors’ Plans of

Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1208] (as amended, the “Disclosure Statement”) in support of their Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code (as amended, the “Plan”). On May 19, 2011, the Court entered an Order approving the Disclosure Statement [Docket No. 1441]. 8. As is customary, the Plan contains release and exculpation provisions for certain

parties that materially contributed to the Debtors’ reorganization, which are part of the overall settlement and compromise in the Plan. LNR’s Releases Under The Fixed/Floating Plan 9. Included in the Fixed/Floating Plan are releases between and among the

Fixed/Floating Releasing Parties, contained in the Fixed/Floating Debtors’ Plan General Release set forth in Article VIII(E). The Plan defines Fixed/Floating Releasing Parties as collectively, each of the following parties in their respective capacities as such: (a) the Lehman DIP Lenders; (b) Five Mile; (c) the Five Mile DIP Agent; (d) the Five Mile DIP Lenders; (e) the Debtors (other than Grand Prix Holdings solely with respect to any guaranty Claims of Midland, Lehman, LCPI, or SASCO); (f) Lehman; (g) New HoldCo and each of the Fixed/Floating Plan Sponsors; (h) Midland; (i) the master servicer for the C6 and C7 Trusts; (j) trustees for the C6 and C7 Trusts; (k) the C6 and C7 Trusts; (l) TriMont, in its capacity as special servicer for the Floating Rate Pool Mezzanine Loan Agreement; (m) Apollo; (n) 6

the Committee; (o) the Independent Committee; (p) SASCO, as holder of 100% of the economic and beneficial interests under the Floating Rate Pool Mezzanine Loan Agreement; (q) LCPI, as administrative agent for SASCO with respect to the Floating Rate Pool Mezzanine Loan Agreement and holder of 100% of the economic and beneficial interests in SASCO; (r) Island Hospitality Management, Inc.; (s) all other Holders of Claims against or Interests in the Fixed/Floating Debtors; (t) the officers, directors, trustees, and members of the Debtors; and (u) each of the foregoing entities’ respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, master servicers, special servicers, trusts and trustees, and professionals. For the avoidance of doubt, certificateholders in the C6 and C7 Trusts, in their capacity as such, are not Fixed/Floating Releasing Parties. Plan § I.A.(81). 10. LNR is not listed as one of the Fixed/Floating Releasing Parties and, based on its

known holdings, is not a “Holders of Claims against or Interests in the Fixed/Floating Debtors” and, therefore, is not releasing Five Mile (or anybody else) under the Fixed/Floating Debtors’ Plan General Release.3

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The Plan clearly does not release any of LNR’s claims as holder of certificates in the C6 and/or C7 Trusts that holds the Fixed Rate Mortgage. Although that has always been clear in the verbiage of the Plan, clarifying language was added at least three times in the Plan, at LNR’s insistence. See e.g. Plan § I.A.(81) (definition of “Fixed/Floating Releasing Parties” specifying that “For the avoidance of doubt, certificateholders in the C6 and C7 Trusts, in their capacity as such, are not Fixed/Floating Releasing Parties); § VIII. A. (“with respect to the C6 and C7 Trusts and the holders of certificates in the C6 and C7 Trusts, in their capacity as such, the Plan does not compromise or settle the Claims, interests, and controversies, if any, of the C6 and C7 Trusts or the holders of certificates in the C6 and C7 Trusts against Midland, the C6 and C7 Trusts, and any holder of certificates in the C6 and C7 Trusts, in its capacity as such, and the foregoing entities’ respective predecessors, successors and assigns, shareholders, affiliates, subsidiaries, principals, employees, agents, officers, directors, trustees, members, or professionals, whether arising under the applicable pooling and servicing agreement, side letter, co-lender agreement, or related documents”); § VIII. E. (“NEITHER THE FIXED/FLOATING DEBTORS’ PLAN GENERAL RELEASE OR ANYTHING ELSE SET FORTH IN THE PLAN OR IN THE PLAN SUPPLEMENT SHALL RELEASE ANY CLAIMS, INTERESTS, OBLIGATIONS, DEBTS, RIGHTS, SUITS, DAMAGES, REMEDIES, CAUSES OF ACTION, AND LIABILITIES, IF ANY, OF THE C6 AND C7 TRUSTS, THE HOLDERS OF CERTIFICATES IN THE C6 AND C7 TRUSTS, IN THEIR CAPACITY AS SUCH, OR LNR PARTNERS, LLC (OR ITS AFFILIATES), LNR SECURITIES HOLDINGS LLC (OR ITS AFFILIATES) WHETHER ARISING UNDER THE APPLICABLE POOLING AND SERVICING AGREEMENT, SIDE LETTER, CO-LENDER AGREEMENT, OR RELATED AGREEMENT AGAINST THE C6 AND C7 TRUSTS, MIDLAND, ANY HOLDER OF CERTIFICATES IN THE C6 AND C7 TRUSTS, IN ITS CAPACITY AS SUCH, OR ANY OF THE FOREGOING ENTITIES’ RESPECTIVE PREDECESSORS, SUCCESSORS AND ASSIGNS,

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LNR’s Releases Under The Remaining Debtor Plan 11. While LNR is not giving any releases under the Fixed/Floating Plan, it is doing so

under the Remaining Debtor Plan. LNR, as special servicer, is listed as one of the Remaining Debtor Releasing Parties. See Plan § 1.A. (198) (“means . . . (e) LNR, in its capacity as special servicer for the each of the LNR-Serviced Loans; (f) the LNR-Serviced Trusts; (g) the master servicer for each of the LNR-Serviced Loans . . .”). 12. Pursuant to the Remaining Debtors’ Plan General Release in Article VIII.H., LNR

is granting and receiving non-Debtor releases to and from other Remaining Debtor Releasing Parties. Five Mile is a Remaining Debtor Releasing Party solely in its capacity as DIP Lender and DIP Agent. See Plan § 1.A. (198). As such, pursuant to the Remaining Debtor Plan General Releases, LNR is only releasing Five Mile as DIP Lender and the DIP Agent – a release it does not challenge. Exculpation Provisions 13. The Plan contains limited exculpations whereby, among other things, Remaining

Debtor Releasing Parties (e.g., LNR) will exculpate Fixed/Floating Releasing Parties (e.g. Five Mile). See Plan § VIII.I. 14. The exculpations are narrowly tailored to cover claims arising in connection with

the Plan, the Commitment Letter, the Disclosure Statement and related transactions and agreements. Clearly Five Mile, given its extensive and highly beneficial role in these cases, described below, as DIP Agent, DIP Lender, bidder and active participant, should be exculpated for its involvement with the exculpated matters, and it is baffling to guess what relevant claims

SHAREHOLDERS, AFFILIATES, SUBSIDIARIES, PRINCIPALS, EMPLOYEES, AGENTS, OFFICERS, DIRECTORS, TRUSTEES, MEMBERS, OR PROFESSIONALS).

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LNR, as special servicer, could possibly have, particularly given its support of the Plan transactions. The LNR/CRES Litigation 15. Finally, with respect to LNR’s role in the LNR/CRES Litigation, the Disclosure

Statement makes clear that “Nothing in the Plan or Disclosure Statement is intended to impair any rights of LNR, CRES, or any other party with respect to the LNR/CRES Litigation.” (DS at 40). 16. LNR ambiguously states in its objection that “[a]lthough the Plan specifically

provides that LNR Securities in its capacity as certificate holder in the C6 and C7 Trusts is not a Fixed/Floating Relating Party, this may not be sufficient to protect all of LNR Securities [sic] rights, including but not limited to those asserted in the CRES Litigation.” (LNR Objection, n. 3). Yet, the language in the Plan and Disclosure Statement could not be any clearer and Five Mile has repeatedly acknowledged that the Plan does not release the LNR/CRES Litigation or any of LNR’s rights therein. 17. In summary, based on LNR’s disclosed holdings, it appears that it is not releasing

Five Mile for anything (other than as DIP Lender and DIP Agent), and therefore its harassing objection should be summarily overruled. E. LNR’s Limited Objection 18. On June 15, 2011, LNR filed the LNR Objection in which LNR opposes “the

proposed Five Mile Releases by any non-debtor parties, including, but not limited to [LNR] and the C6 and C7 Trusts . . .” (¶ 13) (emphasis added).4 LNR argues that Five Mile’s releases by such parties do not satisfy the Metromedia standard. (¶ 15).

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LNR does not oppose Five Mile’s releases as DIP Lender and/or DIP Agent. (LNR Objection ¶ 13).

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F.

Near Universal Support For Five Mile’s Releases 19. Five Mile’s releases in the Plan are widely supported by the parties giving them.

They are a component of the overall compromise in the Plan through which the other parties that materially contributed to the Debtors’ reorganization also will be released. 20. Indeed, the Official Committee of Unsecured Creditors stated as follows in

supporting confirmation of the Plan: [T]he Committee believes that the releases provided for in Article VIII of the Plan are reasonable and appropriate. General unsecured creditors will receive their respective distributions knowing that they will not be asked to return the funds they received before the Petition Date through post-confirmation avoidance actions. In exchange for such valuable consideration, general unsecured creditors will provide certain third-party releases. These releases are a component of the overall compromise encompassed in the Plan, and in light of the circumstances of these Chapter 11 cases and the substantial consideration provided to general unsecured creditors under the Plan, such releases are appropriate. Statement of Official Committee of Unsecured Creditors in Support of Confirmation of the Debtors’ Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1745] ¶ 8. 21. Midland, for itself, and on behalf the C6 and C7 trust holding the Fixed Rate

Mortgage and Lehman, for itself, and behalf of the Floating Rate Mortgage support the Plan and Five Mile’s releases. Both Midland and Lehman were directly involved in the negotiations of the Commitment Letter which contemplated such releases and neither has voiced any concerns, much less objected, to their approval.5

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Notably, the Office of United States Trustee, a frequent objector to non-Debtor releases, has not objected

either.

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REPLY I. FIVE MILE’S RELEASES SATISFY THE APPLICABLE STANDARDS A. 22. Applicable Standards The Second Circuit, in its flagship case, has recognized that non-debtor releases

are permissible under “unique” circumstances. See Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2d Cir. 2005). The court held that when determining whether the circumstances of a case warrant non-debtor releases, the releases must be important to the plan. Metromedia , 416 F.3d at 143 (holding nondebtor releases may be granted where there are “unusual circumstances” justifying the release and the release itself is “important” to the plan of reorganization); SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir. 1992) (“In bankruptcy cases, a court may enjoin a creditor from suing a third party, provided the injunction plays an important part in the debtor’s reorganization plan.”). 23. In the Second Circuit, “importance” of third-party releases hinge in large part on

whether the estate received substantial consideration from the released parties. Metromedia, 416 F.3d at 142. As such, courts have approved non-debtor releases upon a finding that contributions were sufficiently important to a plan. JPMorgan Chase Bank, N.A. v. Charter Communs. Operating, LLC (In re Charter Communs.), 419 B.R. 221, 258-60 (Bankr. S.D.N.Y. 2009) (approving non-debtor releases pursuant to the Metromedia substantial consideration standard where the releasees agreed to undertake actions to permit the reinstatement of senior secured debt at favorable interest rates and refrained from taking action that would degrade the value of the Debtors’ potentially valuable NOLs); In re Adelphia Communications Corp., 368 B.R. 140, 266 (Bankr. S.D.N.Y. 2007) (holding non-debtor releases are not inconsistent with the applicable 11

provisions of title 11 and permissible where the released party provides substantial consideration and approving non-debtor releases for buyer that “agreed to rework their agreements to take the Debtors’ assets in a section 363 sale, when creditors feuding made it impossible to confirm the reorganization plan that the Buyers originally bargained for”); Rosenberg v. XO Commc’ns, Inc. (In re XO Commc’ns., Inc.), 330 B.R. 394, 437-38 (Bankr. S.D.N.Y. 2005) (finding that the record supported non-debtor releases because consent to a stipulation that resolved pending action against debtor was a “contribution” under the Metromedia analysis). B. 24. Five Mile’s Substantial Contributions Under Unique Circumstances Five Mile has made substantial contributions to these bankruptcy cases, to the

Plan and to the Plan process, a fact that supports the Debtors’ decision to include releases to Five Mile in the Plan. 25. As reflected by the record in these cases (and discussed in detail in the Substantial

Contribution Application), Five Mile has played a “unique” role in developing the framework necessary to get these cases from the failed PSA to the eve of confirmation. As DIP Lender, Five Mile financed the Debtors and enabled them to perform vital property improvement projects to preserve the value of their assets. Five Mile also took actions and made contributions that went far beyond those of an ordinary bidder, and which drove direct value into the hands of the Debtors’ creditors, including the C6 and C7 Trusts and LNR. 26. In place of the PSA, Five Mile zealously pursued alternative options, which

resulted in Five Mile and Lehman being chosen to serve as the stalking horse bidder, with Midland’s support, on terms appreciably better for the Debtors and their creditors than in the PSA. Five Mile’s efforts, therefore, brought the Debtors and their key constituents to the negotiating table, paving the road to the largely consensual Plan. Five Mile/Lehman’s initial

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proposal provided the Debtors a $236.6 million cash equity infusion and valued the Debtors’ at an enterprise value of $1.040 billion. 27. Subsequently, Five Mile/Lehman agreed to revise their bid even further to

increase the recoveries to the unsecured creditors, preferred shareholders, and lenders for the mezzanine debt. In addition, by carving out the so-called “sister properties,” from their bid, Five Mile allowed the Debtors to avoid massive litigation over the bidding procedures and also paved the way for the Debtors’ separate process for the “sister properties,” which resulted successfully in Chatham’s $195 million bid that brought enormous value to the Debtors’ estates and creditors – bringing direct benefit to LNR and its constituency.6 28. As the stalking horse bidder, Five Mile facilitated a completely transparent

marketing process and an open and competitive auction process. Throughout, Five Mile consented to subjecting its commitments to rigorous and unbridled marketing by the Debtors, which permitted the Debtors to find other bidders, including Cerberus/Chatham. That process culminated with the auction at which, after twelve rounds of competitive bidding between Five Mile/Lehman and Cerberus/Chatham, the Debtors obtained an unchallenged bid from Cerberus/Chatham valued at $1.12 billion. The auction process thus yielded approximately $154 million in value over and above the stalking horse Five Mile/Lehman Bid, and a windfall over the PSA. The Plan in its form today, which provides a substantially greater recovery to creditors and maximizes the value of the estate, is a direct result of Five Mile’s diligent efforts (working closely with the Debtors), and contribution of considerable time, energy and expense. 29. Notably, Five Mile’s commitment to the Debtors and contribution to the process

did not end with the auction. Five Mile continues to serve as the back-up bidder (with a

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Notwithstanding this, the only releases to Five Mile included in the Remaining Debtors’ Plan General Release are in its capacity as DIP Lender and DIP Agent.

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$20,000,000 deposit) and, while it continues to support the Cerberus/Chatham transaction, it stands ready and willing to close on its last bid at the auction any time prior to the Plan’s effective date (or August 1, 2011, if earlier). 30. The record establishes that Five Mile’s releases are permissible - this case

involves truly “unique” circumstances - the Debtors, their creditors (including LNR) received substantial consideration in exchange for Five Mile’s releases. Thus, Five Mile’s releases are largely consensual, permissible and fall within the applicable Second Circuit standard. *** For all of the foregoing reasons, Five Mile respectfully requests that the Court overrule the LNR Objection, allow the releases and confirm the Plan. Dated: June 22, 2011 New York, New York By: /s/ Adam L. Shiff David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC

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EXHIBIT A

Hearing Date and Time: June 23, 2011 at 10:00 a.m. (prevailing Eastern Time) Objection Deadline: June 20, 2011 at 4:00 p.m. (prevailing Eastern Time)

David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ___________________________________________ : : : : Debtors. : : __________________________________________ : In re INNKEEPERS USA TRUST, et al., Chapter 11 Case No. 10-13800 (SCC) (Jointly Administered)

NOTICE OF FIVE MILE BIDDER’S APPLICATION PURSUANT TO SECTIONS 503(b)(3)(D) AND 503(b)(4) OF THE BANKRUPTCY CODE FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE CLAIMS PLEASE TAKE NOTICE that a hearing (the “Hearing”)1 for the relief requested in the above-referenced application (the “Application”) will be held before the Honorable Shelley C. Chapman, United States Bankruptcy Judge, in Courtroom No. 610 of the United States Bankruptcy Court for the Southern District of New York (the “Court”), Alexander Hamilton Custom House, One Bowling Green, New York, New York 10004-1408, on June 23, 2011 at 10:00 a.m. (prevailing Eastern Time) or such other time as counsel may be heard.

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All capitalized terms used but otherwise not defined herein shall have the meanings set forth in the Application.

PLEASE TAKE FURTHER NOTICE that any objections to the Application: (a) must be in writing; (b) shall conform to the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), all General Orders of the Court, the Local Rules for the United States Bankruptcy Court for the Southern District of New York, and the Notice, Case Management, and Administrative Procedures [Docket No. 68] (the “Case Management Procedures”) approved by the Court; (c) shall be filed with the Bankruptcy Court electronically by registered users of the Bankruptcy Court’s case filing system (the User’s Manual for the Electronic Case Filing System can be found at www.nysb.uscourts.gov, the official website for the Bankruptcy Court); and (d) shall be served so as to be actually received no later than June 20, 2011 at 4:00 p.m. (prevailing Eastern Time) by the entities on the Master Service List (as such term is defined in the Case Management Procedures), which is available at www.omnimgt.com/innkeepers, the website maintained by Omni Management Group, LLC, the Debtors’ notice and claims agent. Only those objections that are timely filed, served, and received will be considered. Dated: June 8, 2011 New York, New York

By: /s/ Daniel A. Fliman David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC

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Hearing Date and Time: June 23, 2011 at 10:00 a.m. (prevailing Eastern Time) Objection Deadline: June 20, 2011 at 4:00 p.m. (prevailing Eastern Time)

David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ___________________________________________ : : : : Debtors. : : __________________________________________ : In re INNKEEPERS USA TRUST, et al., Chapter 11 Case No. 10-13800 (SCC) (Jointly Administered)

FIVE MILE BIDDER’S APPLICATION PURSUANT TO SECTIONS 503(b)(3)(D) AND 503(b)(4) OF THE BANKRUPTCY CODE FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE CLAIMS TO: THE HONORABLE SHELLEY C. CHAPMAN UNITED STATES BANKRUPTCY JUDGE Five Mile Capital Partners LLC and its affiliates (collectively, “Five Mile”) and Hunt Realty Investments, Inc. and its affiliates (“Hunt” and with Five Mile, the “Five Mile Bidder”)1, pursuant to sections 503(b)(3)(D) and 503(b)(4) of title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the “Bankruptcy Code”) hereby file this application (the “Application”) for

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As disclosed in previously filed pleadings, Five Mile selected Hunt as its investor / financing partner in the bid to acquire the Debtors’ equity. Pursuant to an Expense Sharing and Participation Agreement, dated as of November 12, 2010, Five Mile and Hunt agreed to share certain costs and expenses pursuant to a specified allocation. As such, this Application is brought by Five Mile on behalf of both entities (as the Five Mile Bidder) for the total amount of expenses they incurred in making a substantial contribution.

allowance and payment of an administrative expense claim2 in the amount of $718,257.33 arising from the Five Mile Bidder’s substantial contribution to the above-captioned chapter 11 bankruptcy cases (the “Bankruptcy Cases”), and respectfully state as follows: PRELIMINARY STATEMENT3 The Debtors and their constituents have understandably touted the outcome of the auction for the Fixed/Floating Debtors (as well as the other debtors). The final price brings substantial value to the Debtors’ constituents, improves recoveries by more than most ever imagined and appears to be fully consensual among the Debtors’ diverse creditor constituents. This outcome was not accomplished overnight or by mere happenstance. Rather, it was achieved through the direction of this Court and the efforts of certain parties, including the Five Mile Bidder, whose vision, hard work and dedication enabled the Debtors, despite their initial hard-fought refusal, to run an open and competitive process with the support of their secured creditors. Throughout the Bankruptcy Cases, the Five Mile Bidder played an integral and unique role in developing the framework necessary to get from the failed PSA to the eve of confirmation. From its opposition to the PSA; to its financing the Debtors; to its initial commitment letter with Midland; to its obtaining the support of the Debtors’ two largest secured creditors; to its accepted stalking horse bid that was subjected to an open and lengthy marketing process; to its delivery of Midland’s “stapled financing”; to its willingness to sever the “sister properties” from its bid; to its provision of improved recoveries for general unsecured creditors;
2

As discussed infra, pursuant to the Bidding Procedures Order (as defined below), the Court previously approved Five Mile’s expense reimbursement in the amount of $3 million payable upon the earlier of the effective date of the plan for the Fixed/Floating Debtors or consummation of an alternative transaction. As set forth in the Fixed/Floating Debtors’ plan, the Debtors are authorized to pay such amount without the need for further application or notice. By this Application, the Five Mile Bidder only seeks allowance and payment of its expenses not otherwise paid by the Debtors under the Bidding Procedures Order. 3 Capitalized terms used in this Preliminary Statement, but not defined, are ascribed the definitions contained elsewhere in this Application.

2

to its extensive work formulating the documents that served as templates for all other bids; to its active participation in the auction; to its cooperation as back-up bidder and participant in document finalization – the Five Mile Bidder took actions and made contributions that went far beyond those of an ordinary bidder. The Five Mile Bidder’s contributions were more than substantial and resulted in unmistakable, direct benefits to the Debtors and their constituents. First, the Five Mile Bidder’s agreements with Midland and Lehman enabled the Debtors to achieve a consensual reorganization. Second, the Five Mile Bidder’s consistent and unfaltering commitment to bid on the Fixed/Floating Debtors, its role in obtaining the Court’s denial of the PSA and its agreement to expose its stalking horse bid to unprecedentedly long timeframes of open marketing, prevented the Debtors’ constituents from suffering extreme losses through the minimal recoveries proposed in the PSA. Third, the Five Mile Bidder’s stalking horse bid – and its extensively negotiated commitment letter and plan documents – provided the framework for the highly-beneficial Cerberus/Chatham Successful Bid. For these reasons and those set forth below, the Court should allow the Five Mile Bidder’s administrative expense claim in full and direct the Fixed/Floating Debtors to pay same. JURISDICTION 1. The United States Bankruptcy Court for the Southern District of New York (the

“Court”) has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

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BACKGROUND A. 2. The Bankruptcy Filing On July 19, 2010 (the “Petition Date”), each of the debtors in the Bankruptcy

Cases (the “Debtors”) filed a petition with the Court under chapter 11 of the Bankruptcy Code commencing the Bankruptcy Cases. 3. The Debtors are operating their businesses and managing their properties as

debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 4. On the Petition Date, the Debtors filed numerous first day motions, including

motions for authority to enter into the debtor in possession facility with Five Mile (the “Five Mile DIP”). On September 2, 2010, the Court entered a final order approving the Five Mile DIP. Pursuant to the Five Mile DIP, Five Mile loaned the Debtors $53,000,000. B. 5. Five Mile Opposes The PSA Also on the Petition Date, the Debtors filed their Motion to Assume the Plan

Support Agreement (the “PSA Motion”). In the PSA Motion, the Debtors sought approval of a plan support agreement (the “PSA”) for a reorganization plan that would have converted all the secured debt of one lender, Lehman, into 100% of the reorganized equity, while cramming-down all other secured creditors, providing almost $1.19 billion of secured debt treatment worth only $700 million, including $550 million on $825 million principal amount of claims under the Debtors’ pre-petition fixed rate mortgage (the “Fixed Rate Mortgage”). The PSA allocated $500,000 cash to be shared pro-rata among general unsecured creditors of all of the Debtors. Also as part of that deal, Lehman would have sold half of its reorganized equity to the Debtors’ current equity owner, Apollo Investment Corporation (“Apollo”).

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6.

Five Mile vigorously opposed the PSA Motion. It participated in an expedited,

but extensive, discovery process which included numerous depositions and document productions. On August 23, 2010, Five Mile filed an objection to the PSA Motion (the “Five Mile PSA Objection”) asserting that the Debtors had wrongfully entered into the PSA without sufficient diligence or analysis, and were acting in bad faith by pursuing an insider-beneficial deal kept secret from other parties, like Five Mile. Five Mile, through its counsel, argued its objections at the PSA hearing and conducted cross-examinations of various witnesses. C. 7. The August 29 Commitment: The Five Mile Bidder Delivers A Deal Backed By Midland After the Petition Date, the Five Mile Bidder began conducting due diligence for

a potential transaction for the Debtors.4 Five Mile, on September 8, 2010 and Hunt, on September 16, 2010, executed confidentiality agreements with the Debtors, which entitled them to receive extensive financial information and access to a due diligence “data-room.” In September and October, 2010, the Five Mile Bidder’s representatives conducted site visits to each of the Debtors’ hotel properties and held numerous in-person and telephonic meetings with the Debtors’ management team as well as individual hotel managers. 8. As a result of the Five Mile Bidder’s due diligence, at the same time that it was

opposing the PSA, it was also preparing a proposal to acquire the Debtors’ equity. In August, the Five Mile Bidder engaged in extensive negotiations with Midland Loan Services, Inc. (“Midland”) to formulate a commitment letter for the Five Mile Bidder to acquire the Debtors. On August 29, 2011, the Five Mile Bidder and Midland reached an agreement and entered into that certain Binding Commitment for the Acquisition of Innkeepers USA Trust (the “August 29
4

At times throughout the Bankruptcy Cases, Five Mile and Hunt each held a substantial amount of trust certificates issued by the CMBS trusts holding the Fixed Rate Mortgage.

5

Commitment”). In the August 29 Commitment, the Five Mile Bidder committed to fund a chapter 11 plan of reorganization filed and fully supported by Midland. 9. In the August 29 Commitment, the Five Mile Bidder proposed a deal, not subject

to any financing or other material contingency, for which the Five Mile Bidder would serve as stalking horse bidder on terms significantly better for the Debtors and their constituents than in the PSA. The proposal provided the Debtors a $236.6 million cash equity infusion and valued the Debtors’ at an enterprise value of $1.040 billion. (The PSA, in contrast, provided no cash infusion, and left the Debtors with a substantially lower enterprise value). Thus, the minimum recovery by secured creditors, other than Lehman, increased to $768 million, almost a 10% increase over the PSA, of which $600 million was allocated to the Fixed Rate Mortgage. Importantly, because the August 29 Commitment was subject to higher and better bids and a completely transparent marketing process, these amounts created a floor -- rather than the ceiling as in the PSA – with any additional incremental value allocated among the various secured creditors. 10. On August 30, 2010, Midland filed a motion to terminate exclusivity to allow

Midland to propose and pursue the August 29 Commitment. The special servicers for the “sister properties” sought similar relief and joined in Midland’s motion. Midland argued that the August 29 Commitment provided a valuable alternative to the PSA that allowed it to propose a fair and procedurally appropriate plan that also allowed for higher and better offers to maximize creditor recovery. 11. On September 1, 2010, after a lengthy evidentiary hearing, the Court denied the

PSA Motion and found that the Debtors had acted in a manner inconsistent with their fiduciary duties and lacking in transparency, which the Court stated caused it to “question the Debtors’

6

honest interest in exercising due care.” See Bench Decision Denying Debtors’ Motion to Assume Plan Support Agreement, Case No. 10-13800 [Docket No. 776] at 13. Moreover, specifically citing to the August 29 Commitment, the Court found that “[w]hile the Debtors state in their reply that they are aware of no potential alternative that would provide creditors with richer recoveries, it does not appear from the evidence presented that they have canvassed the possible alternatives at this point.” Id. at 9. D. 12. The Five Mile Bidder Brings Lehman On Board And Emerges As Stalking Horse Bidder Extreme acrimony existed among the Debtors and their constituents following the

PSA hearing, as demonstrated by the pleadings and statements before the Court. The Debtors’ key constituents, including Midland, LNR and the Ad Hoc Committee of Preferred Shareholders (the “Ad Hoc Preferreds”) were distrustful of the Debtors and their commitment to a consensual and open process. Indeed, the Ad Hoc Preferreds had filed a motion to appoint an examiner to investigate the Debtors’ dealing in connection with the PSA. Given this and Midland’s pending exclusivity termination motion joined by other constituents, it was doubtful that the Debtors could arrive at a consensual and confirmable plan. 13. The Five Mile Bidder and Midland continued to negotiate a commitment letter

that would result in Midland filing a plan of reorganization pursuant to which the Five Mile Bidder would serve as a stalking horse to generate even higher bids. In addition, the Five Mile Bidder, in an effort to build greater consensus among the Debtors’ creditors, met with Lehman and its financial advisors to discuss a preliminary term sheet. This meeting advanced over the next several weeks with the Five Mile Bidder and Lehman exchanging various drafts of terms sheets resulting, after extensive negotiations, in a stalking horse bid by Lehman and the Five Mile Bidder that was submitted to the Debtors in late November 2010. That bid also had

7

Midland’s full support. As before, the Five Mile Bidder remained willing to subject this bid to higher and better bids through a marketing process and an auction. 14. While initially the Debtors were prepared to select an alternative bid as a stalking

horse bid (which, upon information and belief, was based entirely on the August 29 Commitment), on December 10, 2010, Five Mile/Lehman informed the Debtors they had substantially improved their proposal and that commitment letters had been signed between Five Mile and Lehman and Five Mile and Midland. On December 13, 2010, Five Mile/Lehman agreed to revise their bid further to increase the recoveries to the unsecured creditors, preferred shareholders, and lenders for the mezzanine debt. Thereafter, the Debtors selected the Five Mile/Lehman proposal, as revised (the “Five Mile/Lehman Stalking Horse Bid”), as the highest and best offer and to serve as a stalking horse bid.5 15. Over the next weeks, the Five Mile Bidder, Lehman, Midland and the Debtors

worked tirelessly to negotiate and finalize what ultimately materialized into the commitment letter (the “January 14 Commitment Letter”), dated January 14, 2011, signed by each of those parties. On that day, the Debtors filed a motion (the “Bid Procedures Motion”) to approve the January 14 Commitment Letter, to establish bidding procedures and to approve certain bid protections. 16. In the January 14 Commitment Letter (as in all iterations of proposals by the Five

Mile Bidder to the Company), Five Mile/Lehman agreed to subject the Five Mile/Lehman Stalking Horse Bid to the market and to the Debtors’ process to solicit higher and better bids. Indeed, a unique feature of the Five Mile/Lehman Stalking Horse Bid was the Debtors’

5

The Debtors agreed to allow the alternative bidder (known as “Bidder D”) a $500,000 expense reimbursement even though it might potentially still be a bidder on the assets.

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unrestricted ability to market their assets after filing the Bid Procedures Motion, but before the hearing. As a result, the Debtors aggressively shopped around the Five Mile/Lehman Stalking Horse Bid for nearly six weeks, yet as of the Bid Procedures Hearing (as defined below) concluded that the Five Mile/Lehman Stalking Horse Bid remained the highest and best stalking horse bid. This lengthy and unfettered pre-hearing marketing period was uncustomary in that seldom are stalking horse bids continually marketed so extensively prior to approval of bid protections. E. 17. The Bid Procedures Litigation Multiple parties objected to the Bid Procedures Motion and commenced another

expedited but intense discovery process (beyond what could have reasonably been contemplated). In pursuing their objections, the objectors served Five Mile and its affiliates with document requests and deposition notices. In connection with that discovery, Five Mile reviewed hundreds of thousands pages of documents and participated in more than a dozen depositions, including the deposition of Five Mile’s Rule 30(b)(6) designee. At the conclusion of the discovery process, and in response to the objections, Five Mile filed its reply in support of the Bid Procedures Motion. 18. To obviate various pending objections the Five Mile Bidder (with Lehman)

agreed to modify the January 14 Commitment Letter Bid to carve out the so-called “sister properties,” without an adjustment to the deal consideration and also agreed to increase the consideration provided to general unsecured creditors. The Five Mile Bidder’s concessions avoided massive additional litigation over the bidding procedures and also paved the way for the Debtors’ separate process for the “sister properties,” which resulted successfully in Chatham’s $195 million bid (the “Chatham Bid”). After renegotiating various key provision implicated by

9

this change, the parties on March 10, 2011 executed an amended commitment letter (the “Five Mile/Lehman Bid”). F. 19. The Court Approves The Five Mile/Lehman Stalking Horse Bid Immediately prior to the hearing on the Bid Procedures Motion, the Debtors asked

the Five Mile Bidder and Lehman to remove the $7 million break-up fee from the Five Mile/Lehman Bid. After due consideration, the Five Mile Bidder and Lehman agreed, which further improved creditor recoveries under the Cerberus/Chatham Successful Bid (as defined below). This left only Five Mile’s $3 million expense reimbursement, which is less than 0.31% of the $970.7 million consideration in the Five Mile/Lehman Bid. 20. Following a hearing held on March 11, 2011 (the “Bid Procedures Hearing”), the

Court entered an Order (the “Bidding Procedures Order”) approving the Five Mile/Lehman Bid as stalking horse bid, authorizing certain bid protections (including the $3 million expense reimbursement) and approving certain bidding procedures (the “Bidding Procedures”). The Bidding Procedures provided the Debtors an extensive fiduciary out and afforded the Debtors an additional 45 days to continue shopping the Five Mile/Lehman Bid; a process that had begun six weeks earlier. The Bidding Procedures also included a mechanism to allocate to the Debtors’ secured creditors incremental value generated by any overbids. G. 21. The Five Mile Bidder Creates A Template For Other Bidders Following the Court’s approval of the Five Mile/Lehman stalking horse bid, the

Five Mile Bidder, Lehman, the Debtors and Midland worked diligently to document the deal by negotiating forms of a plan, disclosure statement and escrow agreement pursuant to which Five Mile posted a $10 million deposit. The process was complicated by each party’s differing views and priorities and by the fact that the plan had to be drafted generically to accommodate any

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successful bidder, not specifically the Five Mile/Lehman Bid – which the Five Mile Bidder willingly did. The discussions included numerous lengthy conference calls and several turns of plan drafts. 22. The negotiations with the Five Mile Bidder and others resulted in the plan (the

“April 8 Plan”) that the Debtors filed on April 8, 2011. On April 12, 2011, the Debtors sent a process letter to all potential bidders directing them to include a mark-up of the April 8 Plan with any bids submitted. As such, the April 8 Plan served as the platform for all other bids. 23. During this time, Five Mile and Hunt also worked with each other and their

bidding partners in the Five Mile/Lehman Bid to create a structure for submitting overbids at the auction and for allocating incremental funding commitments among the bidding partners. The bidding partners, which included Five Mile, Lehman, Hunt and certain other potential investors, formed a joint venture and, through separate counsel for each, negotiated an agreement governing each partner’s roles and responsibilities at the auction and beyond. H. 24. The Auction On April 25, 2011, Cerberus/Chatham submitted an overbid (the

“Cerberus/Chatham Baseline Bid”) that the Debtors deemed a qualified overbid in accordance with Bidding Procedures. That bid was for $978.7 million and utilized Midland’s “stapled financing” as envisioned by the Five Mile/Lehman Bid. The Cerberus/Chatham bid package included a plan markup that accepted nearly all the provisions of the April 8 Plan (negotiated by the Five Mile Bidder), with virtually no material changes. 25. With the receipt of the Cerberus/Chatham Baseline Bid, the Debtors proceeded

with an auction for the Fixed/Floating Debtors on May 2, 2011. After twelve rounds of competitive bidding between Five Mile/Lehman and Cerberus/Chatham over thirteen hours, the

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Debtors closed the auction after an unchallenged bid from Cerberus/Chatham valued at $1.12 billion (the “Cerberus/Chatham Successful Bid”). The auction process thus yielded approximately $154 million in value over and above the stalking horse Five Mile/Lehman Bid. 26. The Cerberus/Chatham Successful Bid will provide the Fixed Rate Mortgage a

mortgage note for approximately $723.8 million, which is $173.8 million, or 31.6%, higher than the note proposed in the PSA and $123.8 million, or 20.6%, higher than the note proposed in the August 29 Commitment. The bid also provides Lehman with a cash payment of approximately $233.5 million, satisfying all of its principal and some post-petition interest. 27. At the conclusion of the auction for the Fixed/Floating Debtors, the Debtors

conducted an auction for the “sister properties,” which resulted in Chatham’s $195 million bid. The Five Mile Bidder’s earlier agreement to separate out the “sister properties” – a concept reflected in the modified Five Mile/Lehman Bid crafted by the Five Mile Bidder – brought massive value to the Debtors’ estates and creditors. 28. Following the auction, the Five Mile Bidder worked with the Debtors and other

constituents to finalize the disclosure statement. Leading up to the May 14, 2011 disclosure statement hearing, the Five Mile Bidder advocated various revisions that were needed to protect its interests, including as a holder of trust certificates issued by the CMBS trusts holding the Fixed Rate Mortgage. 29. Thus, without doubt, the process driven by the Five Mile Bidder succeeded in

driving up creditor recoveries. The Five Mile Bidder was instrumental in the process, in the added value, and in paving the way to a consensual deal.

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DESCRIPTION OF THE FIVE MILE BIDDER’S EXPENSES 30. The Five Mile Bidder herein seeks allowance and payment of its $718,257.33 in

expenses6 arising from the Five Mile Bidder’s substantial contribution to the Bankruptcy Cases as an administrative expense claim of the Fixed/Floating Debtors.7 The Five Mile Bidder’s expenses consist of the following:
Entity Kasowitz, Benson, Torres & Friedman LLP Nature of Expenses Fees and expenses charged by Five Mile’s bankruptcy/litigation counsel Fees and expenses charged by Five Mile’s corporate counsel Fees and expenses charged by Five Mile’s real estate counsel Due diligence costs Fees and expenses charged by Hunt’s corporate counsel Travel and other costs Minus Amount Owed Under Bid Procedures Order TOTAL SOUGHT Amount $2,946,194.50

Goodwin Proctor LLP Arnold & Porter LLP Five Mile Sidley Austin LLP Hunt
8

$228,570.79 $129,515.39 $325,765.58 $75,420.00 $12,791.07 ($3,000,000) $718,257.33

A. 31.

Kasowitz, Benson, Torres & Friedman LLP Kasowitz, Benson, Torres & Friedman LLP (“KBT&F”) is Five Mile’s

bankruptcy counsel. It played an active role throughout these Bankruptcy Cases and represented Five Mile in various litigation-related matters including in the dispute concerning the PSA, litigation over the Bid Procedures Motion and in an adversary proceeding between LNR Partners LLC and CRES Investment No. II LP, a Five Mile affiliate. KBT&F has also represented Five
6

This amount is in addition to the $3 million to be paid to Five Mile pursuant to the Bidding Procedures

Order.
7

The expenses for which the Five Mile Bidder herein seeks reimbursement were incurred through May 19, 2011, the date the Court approved the Debtors’ disclosure statement. Nonetheless, the Five Mile Bidder reserves the right to supplement this Application to seek allowance and reimbursement of expenses, including those incurred after May 19, 2011 to the extent it is required to participate further in these Bankruptcy Cases, including in connection with confirmation. 8 This amount represents Arnold & Porter LLP’s fees and expenses incurred in connection with Five Mile’s due diligence of the Debtors’ properties and in formulating proposals for the Debtors’ assets. Five Mile also retained Arnold & Porter LLP to provide advice in connection with the Five Mile DIP, the fees for which the Debtors have paid pursuant to the Five Mile DIP agreement.

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Mile in drafting and negotiating deal-related documents including, without limitation, term sheets, commitment letters, agreements with secured creditors, the plan, the disclosure statement and other ancillary documents. KBT&F has appeared on Five Mile’s behalf in numerous hearings, depositions, chambers conferences and countless meetings among the parties. 32. Through May 19, 20119, the Five Mile Bidder incurred $2,946,194.50 in expenses

arising from KBT&F’s representation of Five Mile, consisting of $2,886,210.50 in fees and $59,984.00 in expenses.10 B. 33. Goodwin Proctor LLP GP is Five Mile’s corporate counsel. It advised Five Mile in formulating its

proposals for the Debtors’ assets and with respect to related real estate issues. Moreover, GP represented Five Mile in its joint venture with Lehman, Hunt and other parties, who jointly were bidders in the Five Mile/Lehman Bid. 34. Through May 19, 2011, the Five Mile Bidder incurred $228,570.79 in expenses

arising from GP’s representation of Five Mile, consisting of $226,574.94 in fees and $1,995.85 in expenses. C. 35. Arnold & Porter LLP AP is Five Mile’s real estate counsel and advised Five Mile in its due diligence of

the Debtors’ properties and in formulating its proposals for the Debtors’ assets. Through May

9

While KBT&F charged a total of $154,941.50 for fees incurred between May 1, 2011 and May 19, 2011, the Five Mile Bidder only includes in this Application $133,170.50 (or approximately 85%) of KBT&F’s fees from that timeframe. The remaining fees of $21,771.00 relate to KBT&F’s preparation of this Application, for which the Five Mile Bidder does not seek reimbursement. 10 Inasmuch as this Application seeks allowance and payment of less than 20% of the Five Mile Bidder’s total expenses, the Five Mile Bidder has not prepared and submitted time records and disbursement details for KBT&F, Goodwin Proctor LLP (“GP”), Arnold & Porter LLP (“AP”) and Sidley Austin LLP (“Sidley”). The Five Mile Bidders will make those items available for inspection upon request by the Court.

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19, 2011, the Five Mile Bidder incurred $129,515.39 in expenses arising from AP’s representation of Five Mile, consisting of $128,845.00 in fees and $670.39 in expenses. D. 36. Sidley Austin LLP Sidley is Hunt’s corporate counsel and represented it in connection with

documenting the terms of the joint venture with Lehman, Five Mile and other parties, who jointly were bidders in the Five Mile/Lehman Bid. Through May 19, 2011, the Five Mile Bidder incurred $75,420 in expenses incurred from Sidley’s representation of Hunt, consisting of $75,270 in fees and $150 in expenses. E. 37. Five Mile’s Diligence Expenses Since the Petition Date, the Five Mile Bidder incurred at least $325,765.58 in

expenses arising from Five Mile’s out-of-pocket expenses from conducting due diligence of the Debtors’ properties, assets and operations. That amount includes: (a) $120,250 paid to obtain property, environmental and seismic reports from IVI International, Inc., a construction and environmental consulting firm; (b) $15,500 paid to obtain hotel supply data from Lodging Econometrics, market analysts and research specialists in the hotel real estate sector; (c) $6,500 paid to acquire relevant economic data from Moody’s Analytics, Inc., through Economy.com; (d) $690 paid to acquire an extended stay segment study from The Highland Group, a global business consulting firm; (e) $160,974 paid to Peter Chong, a consultant specializing in the hospitality industry and (f) $21,851.58 of travel and related out-of-pocket costs incurred while conducting site visits to all the Debtors’ hotel locations.11

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Five Mile represents that it incurred each of the foregoing expenses in the course of its due diligence. If necessary, the Five Mile Bidder is prepared to provide further data and documentation of any expenses sought herein to the Court and/or parties-in-interest.

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F. 38.

Hunt’s Expenses Since the Petition Date, the Five Mile Bidder incurred at least $12,791.07 in

expenses arising from Hunt’s out-of-pocket expenses, which includes $2,300 paid to obtain underwriting assistance from Prism Hotel Partners and $10,491.07 of travel and related out-ofpocket costs incurred while conducting site visits to the Debtors’ hotels and attending the auction held on May 2, 2011, including flights, meals and lodging. BASIS FOR RELIEF I. APPLICABLE STANDARD 39. Section 503(b)(3)(D) of the Bankruptcy Code provides for the allowance as an

administrative expense of the actual, necessary expenses incurred by a creditor in making a substantial contribution in a chapter 11 case. 11 U.S.C. § 503(b)(3)(D); see also 11 U.S.C. § 503(b)(4) (administrative expense claims for professional services rendered by an attorney or an accountant on behalf of parties entitled to section 503(b)(3)(D) claims). 40. The reimbursement of stakeholders who make a substantial contribution to a

chapter 11 case is designed to promote meaningful participation in the reorganization process. In re Dana Corp., 390 B.R. 100, 108 (Bankr. S.D.N.Y. 2008); see also In re Granite Partners, 213 B.R. 440, 445 (Bankr. S.D.N.Y. 1997). 41. Although the Bankruptcy Code does not define “substantial contribution,” courts

in this and other districts have held that an applicant has substantially contributed to a chapter 11 case if it has provided “an actual and demonstrable benefit to the debtor’s estate, its creditors, and to the extent relevant, the debtor’s shareholders.” Id. (quoting In re U.S. Lines, Inc., 103 B.R. 427, 429 (Bankr. S.D.N.Y. 1989)).

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42.

“Factors which the courts have considered in determining whether an applicant

has made a substantial contribution in a chapter 11 case include: [1] whether the services were provided to benefit the estate itself or all of the parties in the bankruptcy case; [2] whether the services conferred a direct, significant and demonstrably positive benefit upon the estate; and [3] whether the services were duplicative of services performed by others.” See Id.; see also Trade Creditor Group v. L. J. Hooker Corp. (In re Hooker Invs., Inc.), 188 B.R. 117, 120 (S.D.N.Y. 1995), aff’d, 104 F.3d 349 (2d Cir. 1996); In re Villa Luisa, L.L.C., 354 B.R. 345, 348 (Bankr. S.D.N.Y. 2006) (courts have looked to “whether there has been a contribution that is considerable in amount, value and worth, which directly, demonstrably and materially contribute to the debtor’s reorganization” in determining whether a substantial contribution has been made within the meaning of section 503(b)); In re Bethlehem Steel Corp., 2003 WL 21738964, at *6 (Bankr. S.D.N.Y., July 28, 2003).12 43. Further, courts exercise their discretion and examine the totality of the relevant

facts when determining whether services substantially contribute in a chapter 11 case. See In re U.S. Lines, 103 B.R. at 430 (discussing the role of the court in determining substantial contribution issues); see also In re 9085 E. Mineral Office Bldg., Ltd., 119 B.R. 246, 253 (Bankr. D. Colo. 1990) (awarding compensation where applicant’s efforts, when “viewed as a whole,” made a substantial contribution to the debtor’s estate).

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While some courts have imposed an additional altruism element, other courts have rejected that requirement. Most recently, in In re Delphi Corp., Judge Drain explained as follows: “The motive of the creditor has unfortunately crept into some of the cases in their analysis of whether the benefit conferred was direct or indirect. Some courts have taken the view that acting in one’s self interest bars a creditor from making a substantial contribution claim. Other courts, I think, have properly recognized that mere motive should not be determinative of the outcome.” In re DPH Holdings Corp, et al., Case No. 05-44481 (Bankr. S.D.N.Y) (May 20, 2010 Hrg. Trans.) at 113:1-6; excerpt annexed hereto as Exhibit A.

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44.

Applying these substantial contribution factors, the Five Mile Bidder is entitled to

reimbursement and an administrative expense claim because it has undeniably conferred actual and demonstrable benefits to the Debtors’ estates. II. THE FIVE MILE BIDDER’S CONTRIBUTIONS CONFERRED A DIRECT, SIGNIFICANT AND DEMONSTRABLY POSITIVE BENEFIT UPON THE DEBTORS’ ESTATES AND CREDITORS A. 45. The Five Mile Bidder’s Undeniable Contributions The Five Mile Bidder’s contributions to the Bankruptcy Cases are clear and well

known and set forth throughout the record in these Bankruptcy Cases. The Five Mile Bidder, through extensive negotiations, brought Midland to the table and obtained its consent to plan treatment at a time when severe acrimony prevailed and it was questionable whether the Debtors could achieve a consensual plan. The Five Mile Bidder, following months of discussions, then brought Lehman in as a partner to the deal, thereby garnering the two largest secured creditors’ support for the Five Mile/Lehman Bid (whereas previously Midland and Lehman had been locking heads over the PSA). 46. Throughout, the Five Mile Bidder has held its bid open to unprecedented

marketing and sales processes that subjected its proposal to rigorous bidding. To this day, the Five Mile Bidder is committed to the deal and happily serves as the back-up bidder.13 47. The Five Mile Bidder, however, is more than just a bidder. It established the

structure by which people bid. Indeed, the Five Mile/Lehman Bid was and remains the focal point in the Debtors’ reorganization process, as it laid the groundwork for the Midland “stapled financing,” the framework for the Debtors’ marketing process, and the basis and construct for the Cerberus/Chatham Successful Bid as well as the highly-negotiated provisions in the Debtors’
13

Indeed, following the auction, the Five Mile Bidder agreed to modify its escrow agreement to double the amount of its deposit.

18

approved disclosure statement and plan. In addition, the Five Mile Bidder was instrumental in preventing the PSA from being approved through its initial commitment letter, its forceful objection and cross-examination at the PSA hearing. 48. As such, the Five Mile Bidder clearly made real contributions. See, e.g., In re

Bayou Group, LLC, 431 B.R. 549, 561-562 (Bankr. S.D.N.Y. 2010) (“The majority of cases allowing creditors’ substantial contribution claims . . . involved a creditor who actively facilitated the negotiation and successful confirmation of the chapter 11 plan or, in opposing a plan, brought about the confirmation of a more favorable plan.”). B. 49. 50. The Five Mile Bidder’s Contributions Directly, Significantly and Demonstrably Benefited the Debtors’ Estates and Creditors The Five Mile Bidder’s contributions benefited the Debtors’ estates and creditors. First, the Five Mile Bidder’s formulation of the August 29 Commitment and

opposition to the PSA avoided the disastrous impact of the PSA and its minimal creditors recoveries. Had the PSA been approved, the Fixed Rate Mortgage would have received a note for $550 million, whereas the Five Mile/Lehman Bid proposed a note for $622.5 million and ultimately the Cerberus/Chatham Successful Bid will provide a note for approximately $723.8 million (plus $12 million in cash). The approximately 31.6% increase in the Fixed Rate Mortgage’s recovery is a direct, significant and demonstrable benefit of the Five Mile Bidder’s contributions. Similarly, while under the PSA general unsecured creditors would have received $500,000, under the Cerberus/Chatham Successful Bid those constituents will receive $4.75 million plus additional distributions on account of the Chatham Bid at the “sister properties” – the increase to general unsecured creditor recovery is another direct result of the Five Mile Bidder’s contributions. The Five Mile Bidder, throughout, has agreed to subject its commitment to higher and better bids and to an open marketing process with broad time frames resulting in

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genuine market testing -- the significant value and improved recoveries generated at the auction are a testament to the Five Mile Bidder’s contributions. 51. Second, the Five Mile Bidder’s contributions by bringing Midland and Lehman to

the table and by stripping the “sister properties” from its bid to proceed with their own process, enabled the Debtors to achieve a consensual deal, which previously they had been unable to do, and improved the treatment of the “sister property” creditors and interests. The Debtors’ ability to confirm a plan was extremely valuable to the Debtors and their creditors. Moreover, availability of the “stapled financing” reduced bidder’s outside financing requirements, improving their willingness to increase their bids. As such, the Five Mile Bidder’s extensive work to bring Lehman and Midland to the table translated into a direct, significant and demonstrable benefit to the Debtors’ constituents. 52. Third, the Five Mile Bidder’s efforts resulted in the Five Mile/Lehman Bid and

the April 8 Plan, which served as the focal documents for all other bids. Indeed, the Debtors heavily relied on those documents in their marketing process as they provided a uniform set of rules for the Debtors to evaluate bids. Moreover, the April 8 Plan dictated creditor treatment including the mechanism for allocating overbids, which was the construct that enabled the Fixed Rate Mortgage and Floating Rate Mortgage directly to reap the benefits of the Cerberus/Chatham Successful Bid. Finally, because the April 8 Plan already had the benefit of the Five Mile Bidder’s extensive negotiations with Midland, the Debtors and Lehman, its creation facilitated approval of the Debtors’ disclosure statement and (most likely) plan for the Cerberus/Chatham Successful Bid. 53. significant. As such, the Five Mile Bidder’s contributions were real, direct, knowable and

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III.

THE FIVE MILE BIDDER’S SERVICES WERE NOT DUPLICATED BY OTHER PARTIES 54. No other parties made the same contributions as the Five Mile Bidder. The Five

Mile Bidder was the only party in August 2010 to put forward a bid for the company that would remain subject to higher and better bids. The Five Mile Bidder then was the only party that brought Midland and later also Lehman to the table to facilitate a consensual deal. The Five Mile Bidder, as stalking horse bidder, was uniquely positioned to negotiate terms for a plan and disclosure statement with the Debtors, providing the baseline for all other bids. IV. THE FIVE MILE BIDDER’S EXPENSES ARE REASONABLE 55. 56. The Five Mile Bidder’s expenses of $3,718,257.33 are reasonable. Acquiring the Fixed/Floating Debtors is not a run of the mill transaction. The size

of the deal, the complexities of the assets and the Debtors’ convoluted debt structure created difficult business and legal issues. The Five Mile Bidder needed to expend massive resources extensively analyzing the Debtors’ finances and operations; conducting business and legal due diligence, including reviewing documentation, conducting site visits and interviewing managers, and conducting discussions with potential financing sources and operating partners. The Five Mile Bidder was forced to spend time and resources defending against extensive discovery, just to keep the deal alive. In the meantime, the Five Mile Bidder has tied up its fund capital, which otherwise could have resulted in other business opportunities. 57. That the Five Mile Bidder’s expenses – incurred over ten months of work on a

transaction exceeding $1 billion – are reasonable and justified is further highlighted by other parties’ asserted expenses in these Bankruptcy Cases. First, the Debtors’ plan proposes paying the Ad Hoc Preferreds and its advisors $3.5 million “for its role in the Chapter 11 Cases” – without diminishing the Ad Hoc Preferreds’ accomplishment, the Five Mile Bidder believes that

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itself created much more value to the Bankruptcy Cases. Second, the Court already approved paying $500,000 (with potentially another $500,000) in expense reimbursement to Chatham in connection with its $195 million bid to acquire the “sister properties” – Chatham worked on that much smaller transaction for a fraction of the time the Five Mile Bidder spent on these cases. Third, the Court already approved $3 million in expense reimbursement to Cerberus/Chatham (in addition to a $12 million break-up fee), payable if the Debtors consummate an alternative transaction – the Cerberus/Chatham Successful Bid was modeled after the Five Mile/Lehman Bid and therefore Cerberus/Chatham avoided spending much of the time and resources the Five Mile Bidder spent getting to its bid.14

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Notwithstanding language in the Bidding Procedures which seemingly precluded Cerberus/Chatham’s expense reimbursement and break-up fee, the Five Mile Bidder did not object to approval of those payments as it believed it was helpful to moving the deal forward for the benefit of all constituents; an act consistent with the Five Mile Bidder’s behavior throughout the Bankruptcy Cases.

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CONCLUSION 58. For the foregoing reasons, the Five Mile Bidder respectfully requests that the

Court enter an order (i) allowing its administrative expense claim against the Fixed/Floating Debtors as set forth herein in the total aggregate amount of $718,257.33, (ii) directing the Fixed/Floating Debtors’ payment thereof and (iii) granting such other and further relief as is just and proper. Dated: June 8, 2011 New York, New York

By: /s/ Daniel A. Fliman David M. Friedman ([email protected]) Adam L. Shiff ([email protected]) Daniel A. Fliman ([email protected]) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Five Mile Capital Partners LLC

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1

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 05-44481-RDD - - - - - - - - - - - - - - - - - - - - -x

In the Matter of:

DPH HOLDINGS CORP., et al.,

Reorganized Debtors.

- - - - - - - - - - - - - - - - - - - - -x

U.S. Bankruptcy Court 300 Quarropas Street White Plains, New York

May 20, 2010 10:12 AM

B E F O R E: HON. ROBERT D. DRAIN U.S. BANKRUPTCY JUDGE

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been happening while at the same time there was no effort that management was similarly experiencing some level of contribution to the pay-in would have made it very difficult for the estate to continue. So our view, Your Honor, is that we've adequately supported the claims and that they should each be granted. THE COURT: MR. MEISLER: Okay. Your Honor, as a final point on the EPCA

and amended EPCA in particular, we would just mention two things. One is that we don't believe that the objections to

the EPCA and amended EPCA, on account of any parties, provided a substantial contribution, because ultimately, those agreements became irrelevant in hindsight. And the other thing

I'd like to mention, and it's illustrated fairly clearly in Exhibit 3 to our binder, is that the objections made by the various parties were duplicative. You can see that it goes

through on various grounds, and many of the stakeholders in our cases objected on the same grounds. THE COURT: Okay. Thank you, Your Honor.

All right, I have before me a motion by the IUE-CWA under Sections 503(b)(3)(d) and (b)(4) of the Bankruptcy Code for the allowance and payment of $1,238,304.85 in connection with work done by its counsel in this Chapter 11 case on the basis that the IUE and its counsel made a substantial contribution in the case insofar as that work was done.

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The debtors, now named DPH Holdings, have objected to the application. The U.S. trustee has submitted a statement in The application, as I noted, is

support of the application.

governed by Section 503(b)(3)(d) and (b)(4) of the Bankruptcy Code. As I recently described in In re: Bayou Group, LLC,

2010 W.L. 1416776, (Bankr. SDNY, April 5, 2010) the Court's analysis of such a motion is a two step analysis. First, the

Court is to determine whether, in fact, the creditor, through its counsel, made a substantial contribution in the case, and then secondly, as set forth in 503(b)(4), whether the compensation requested by such counsel is reasonable based on the time, the nature, the extent, and the value of such services and the cost of comparable services, other than a case under this title, as well as reimbursement of actual necessary expenses incurred by such attorney. The issue of whether a party has made a substantial contribution in a case is one that has been frequently addressed and written on by bankruptcy courts and appellate courts, and certain basic principles are clear. First, the

applicant has the burden of proof by a preponderance of the evidence on both prongs of the analysis. In re: United States

Lines, Inc., 103 B.R. 427, 430 (Bankr. S.D.N.Y. 1989). Secondly, in keeping with the general rule that priorities must be narrowly construed -- and of course, this is a claim that would be entitled to a hundred cents on the dollar

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payment -- in light of the presumption in bankruptcy cases that the debtor's limited resources will be equally distributed among all unsecured creditors. That also is set forth in the

U.S. Lines case, but the larger principle on a narrow construction of claims for administrative expense is set forth in Howard Delivery Service v. Zurich American Insurance Company, 547 U.S. 651, 667 (2006) and by the Second Circuit in In re: 2007). Bethlehem Steel Corp., 479 F.3d 167, 172, (2d Cir. See also In re: Dana Corp., 390 B.R. 100, 108, (Bankr. Granite Partners, L.P., 213 B.R.

S.D.N.Y. 2008) and In re:

440, 445, (Bankr. S.D.N.Y. 1997) in which Judge Bernstein said, "Substantial contribution provisions must be narrowly construed to, among other things, discourage mushrooming expenses and do not change the basic rule that the attorney must look to his own client for payment." In addition to that basic rule, it also should be noted that the Code establishes other claims and priorities for such expenses, for example, of the -- as part of the unsecured claim in cases where a creditor secured the secured claim of a creditor. See 11 U.S.C. Section 506(b) which covers a secured

creditor's right to legal fees and expenses from the debtor as well as Travelers Casualty and Surety Company of America v. PG&E, 549 U.S. 443, 453 (2007) and Ogle v. Fidelity & Deposit Company, 586 F.3d 143, 149 (2d Cir. 2009), in which the Second Circuit allowed a general unsecured claim for post-petition

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attorneys' fees provided for in a prepetition contract. Of

course, as a general unsecured claim, that claim, unlike a claim under 503(b)(3) and (b)(4), would be paid in only "tiny" bankruptcy dollars. The courts have also been clear that mere active participation in a Chapter 11 case does not give rise to a right to be compensated under 503(b)(3) and (b)(4). Rather,

the creditor must show that such participation resulted in a demonstrable, or demonstrated, direct benefit to the estate, the creditors, and in applicable instances, to stockholders. In re: McLean Industries, Inc., 88 B.R. 36, 38-39 (Bankr. Alert Holdings, Inc., 157 B.R. 753,

S.D.N.Y., 1988) and In re:

757 (Bankr. S.D.N.Y., 1993) in which the Court stated that extraordinary action must lead to direct, tangible benefits to creditors for Section 503(b)(3)(D) claims to be allowed. This

requirement for a direct benefit is stated in various ways in the cases. But what comes through clearly is that the benefit

to the estate must not only be a net benefit and material and concrete, but also needs to be a benefit demonstrably for the estate as a whole, as opposed to something that goes to the creditor and, indirectly, those in the creditor's class. In re: Granite Partners, 213 B.R. at 446-47 where Judge See

Bernstein extensively discusses those situations where such requests had been granted and contrasts them with situations where they have not been granted.

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The motive of the creditor has unfortunately crept into some of the cases in their analysis of whether the benefit conferred was direct or indirect. Some courts have taken the

view that acting in one's self interest bars a creditor from making a substantial contribution claim. Other courts, I

think, have properly recognized that mere motive should not be determinative of the outcome. However, that still leaves the

question of whether the benefit was, in fact, direct or rather a mere consequence for others in the same class as the claimant. Se In re: Pow Wow River Campground, Inc., 296 B.R. DP Partners, Limited

81, 86 (Bankr. D. N.H., 2003) and In re:

Partnership, 106 F.3d 667, 673 (5th Cir., 1997), cert. denied 522 U.S. 815 (1997). What the discussion about motive does highlight, however, is the heavy burden that a creditor faces in showing that it, in fact, made a direct contribution, as opposed to an indirect benefit flowing from actions it's taken to further its own interests in the case. See In re: Dana Corporation, 390 Granite Partners,

B.R. 100, 108 as well, again, as In re: L.P., 213 at 445.

As I noted in the Bayou case, a corollary of the requirement for direct contribution, which is also related to the fact that claims for substantial contribution will not be allowed where the work duplicated the work of others who are already being compensated by the estate, including the debtors'

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